Two of the most generous IHT reliefs are Agricultural Property Relief (APR) and Business Property Relief (BPR).
With them each providing up to 100% relief it is perhaps unsurprising that the borders of each tend to be closely monitored by HMRC. Their challenges often end up in court, giving guidance into the legislation.
One area HMRC are keen to block is making an APR claim on an expensive executive house. With changes in modern agriculture and common place use of cars for work commuting, houses which were historically farm houses are now often owned by city dwellers with nebulous connections to agriculture. APR is generally blocked in these cases, because of the need for the dwelling to be used for agriculture and be of an appropriate ‘character’ in relation to the farming operation.
Historically, HMRC have argued that this nexus between the house and land requires common use and ownership. In a recent case (Hanson) the Tribunal held that this was not the case. Agricultural use was required, along with appropriate character for the relevant farming operation, but not necessarily common ownership. This conclusion may prove very useful, especially in certain farming situations where different generations of a farming family may have different interests. Often these evolve over time, without the parties necessarily taking the advice at each stage.
In another recent case (Zetland) the Tribunal found that no BPR was due, because the business was mainly one of dealing in land or the making or holding of investments. Interestingly, the judgement does not seem to imply that the activities in managing commercial property were not a ‘business’. The problem was rather that the nature of that business caused a disallowance of BPR.
As ever, understanding the consequences of dealing with valuable assets is important – even if it may mean paying for professional advice!
A series of articles highlighting key areas that affect taxpayers and practitioners involved with inheritance tax and estates and identifying opportunities to mitigate inheritance tax.
Inheritance Tax & Estate Tax Planning
Inheritance tax and estate planning is an important tool to ensure that wealth is preserved for future generations.
The nature of the planning undertaken will depend on the type and value of assets in the estate as well as the overall objectives such as who is to benefit from the assets, degree of control and distribution of income.
Examples of inheritance tax and estate planning opportunities include:
- Business Property Relief – up to 100% relief for the value of qualifying business interests, shareholdings and assets
- Agricultural Property Relief – up to 100% relief for the value of qualifying land/property used for agricultural purposes
- Woodlands Relief – up to 100% relief against the value of timber on the land, although a charge may subsequently arise if the timber is later sold
- Gifts to charity
- Making full use of allowances such as the annual allowance and gifts on marriage
- Regular gifts out of income
- Outright gifts to individuals/trusts
- Trusts for vulnerable persons
Non-UK Domicile Tax Planning
Non-UK domiciled persons are usually only subject to inheritance tax on their UK situs assets, however where a person has been resident in the UK for 17 out of the last 20 tax years they are automatically deemed to be domiciled in the UK, potentially bringing their worldwide assets within the scope of UK inheritance tax.
However, where a person sets up an offshore trust to hold overseas assets whilst non-UK domiciled/deemed domiciled, the trust will be treated as excluded property and should remain outside the UK inheritance tax net.
In certain cases, it may be possible to restructure the ownership of assets to allow assets that would otherwise be treated as UK situs to qualify as excluded property. Although care will need to be taken, particularly where the recent changes to the stamp duty land tax rules are in point.
Inheritance tax and estate planning is a complex area and advice should be sought before any planning is undertaken.
Anti-Avoidance & Other Considerations
Where inheritance tax planning is to be utilised care should be taken to ensure that the planning does not fall foul of anti-avoidance legislation such as the rules for gifts with reservation of benefit, associated operations, pre-owned asset tax etc.
It will also be necessary to consider the potential impact of the proposed planning on other taxes such as capital gains tax, VAT, SDLT and relevant anti-avoidance rules such as the settlement provisions and transfer of assets abroad.
A further key consideration will be the commercial and practical aspects of the planning – in our experience bespoke advice that is tailored to the individual’s precise circumstances is more likely to achieve the desired result than one size fits all schemes.