Farmers face potentially significant changes to Inheritance Tax (IHT) after proposals released earlier this month from the Office of Tax Simplification (OTS), according to rural accountant Old Mill.
The OTS review could result in a number of revisions to IHT, with both positive and negative impacts for farms, says head of rural services Andrew Vickery. “There are two proposals in particular which could have quite an impact upon farms and rural businesses, should the Treasury decide to implement them.”
The first proposal would be fairly positive as it involves possibly aligning the IHT treatment of furnished holiday lets with that of Income Tax and Capital Gains Tax (CGT).
“In recent years there has been uncertainty and less ability to claim IHT relief on furnished holiday lets as they weren’t necessarily seen as trading activity,” says Mr Vickery. “While genuine furnished holiday lets qualify for certain CGT and Income Tax reliefs, they were generally classified as investments for IHT.
“Now, in a bid to simplify the system, the OTS has recommended that holiday lets satisfying the qualifying criteria for Income Tax and CGT purposes should also qualify for Business Property Relief (BPR), which gives 100% relief from IHT. This will be a welcome change to diversified business owners, potentially saving £10,000s in tax.”
Unfortunately, a less favourable proposal for farm businesses is to align the eligibility for IHT and CGT trading reliefs, says Mr Vickery. At present, to qualify for BPR a business’s activities and assets must be ‘wholly’ or ‘mainly’ trading – so at least 50%.
The new proposals could see this trading threshold increase to 80%, to come in line with CGT requirements, he warns. “This would mean that those farming and estate businesses which have diversified into other non-trading enterprises such as property letting or some renewable energy activities could find their IHT exposure increasing very significantly.”
Though these are simply recommendations for the Treasury to consider, there is likely to be a detailed consultation about the proposals, with any changes introduced in the Autumn Budget at the earliest, says Mr Vickery.
“Whether there is even an appetite to make big changes to the tax system in light of the Brexit uncertainty remains to be seen. However, it is worth farmers and estate owners familiarising themselves with the OTS proposals and speaking to their accountant, to see what the effects might be. This is especially relevant to mixed businesses with both trading and non-trading activities.”