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
Overview
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.
 
 
 

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 & Relief for Falls in Value (Part 2)
In the current economic climate reliefs that reduce the amount of inheritance tax payable where assets have fallen in value may be of particular interest to taxpayers and their advisors.
Transfers on Death 
Inheritance tax is generally calculated based on the value of the property at the date of death.
However, in some circumstances it may be possible to reduce the value on which inheritance tax is payable where the asset is later sold at a loss.
Where the claim is made, the base cost of the asset for capital gains tax purposes will be reduced to the new probate value so as to avoid the loss being relieved twice.
Sales of Listed Shares/Unit Trust Units
Where the personal representatives sell listed shares, units in an authorised unit trust or shares in an open ended investment company at a loss within 12 months of death a claim may be made to reduce the value that is subject to inheritance tax.
The claim will normally be made by the personal representatives (as the person liable for inheritance tax on the free estate) therefore the relief is unlikely to be available where the shares/units are distributed and later sold by the beneficiaries.
In the case of a trust in which the deceased had a qualifying interest in possession, there are provisions which permit the trustees to make a similar claim.
The relief is calculated in accordance with special rules and it is important to note that the amount of relief will be affected by:

  • All sales (whether at a gain or loss) by the personal representatives/trustees  in the 12 month period,
  • Purchases by the personal representatives/trustees in the period commencing with the date of death and ending 2 months after the last sale in the 12 month period.
  • Costs of sale and purchase are ignored

Sales of Land & Buildings
Where the personal representatives sell land at a loss within 4 years of death, a claim may be made to reduce the probate value for inheritance tax purposes.
Again, the relief is not available where the property has been appropriated to a beneficiary and later sold.
Furthermore, the relief is restricted where the sale is to certain connected parties with an interest in the property.
The amount of relief will be affected by:

  • Sales at a loss by the personal representatives/trustees within 4 years of death,
  •  Sales at a gain by the personal representatives/trustees within 3 years of death,
  • Profits and losses that are less than the lower of £1,500 or 5% of probate value are ignored.
  • Purchases by the personal representatives/trustees in the period commencing with the date of death and ending 4 months after the last sale in the 3 year period.

Sales of ‘Related Property’
Where assets were valued using the related property rules and there is a sale at a loss within 3 years, a claim for relief may be made.
The relief is given by reducing the probate value to the standalone value of the asset at the date of death (i.e. ignoring the related property rules) and not to the sale value.

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 & Relief for Falls in Value (Part 1)
In the current economic climate reliefs that reduce the amount of inheritance tax payable where assets have fallen in value may be of particular interest to taxpayers and their advisors.
Lifetime Transfers
Where an asset is transferred during lifetime and the transferor does not survive 7 years from the date of the gift, inheritance tax at death will normally be calculated based on the value as at the date of the gift.
However relief is available where:

  1. The asset is retained by the transferee (or their spouse/civil partner) and the value at death is lower than the value at the date of the gift, or
  2. The asset is sold by the transferee (or their spouse/civil partner) at a loss prior to the date of death and the sale does not fall foul of anti-avoidance provisions aimed at transfers not at arm’s length.

The rules apply to most types of assets except wasting chattels (tangible movable property with a wasting life of no more than 50 years such as plant and machinery).
The relief is available in respect of inheritance tax on both failed Potentially Exempt Transfers (PETs) and the additional inheritance tax payable on death in respect of Chargeable Lifetime Transfers (CLTs).
However, the relief does not affect the original computation (i.e. in the case of a CLT there will be no change to the computation of the lifetime tax payable at the date of gift) or the cumulative total for calculating the available nil rate band on subsequent gifts and the death estate.
The claim must be made by person that is liable to pay the inheritance tax in respect of the PET/CLT which will normally be the donee.

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 – Overseas Issues
General Rules
Where a person is UK domiciled their estate will be subject to inheritance tax on their worldwide assets.
Therefore overseas assets such as foreign bank accounts, holiday homes etc. will be subject to inheritance tax in the UK.
Relief is given for foreign liabilities (for example an overseas mortgage) by deducting the amount of the liability from the value of non UK property.  Any excess can then be set off against UK property.
 Foreign Property – Deduction for Expenses
Where the estate includes overseas property, the personal representatives may incur additional expenses in connection with the disposal.
It is possible to claim a deduction for expenses of administering or selling overseas property up to a maximum of 5% of the value of all foreign property in the estate.
Thus, where the estate of a UK domiciled person includes a house in Spain worth £250,000, the personal representatives may claim a deduction for expenses of up to £12,500 (£250,000 x 5%), potentially saving inheritance tax of £5,000 (£12,500 x 40%).
Double Tax Relief
Where an estate is subject to inheritance tax in both the UK and another country on the same assets the estate may be subject to double tax.
The UK has double tax treaties for inheritance tax purposes with the Republic of Ireland, USA, South Africa, France, Netherlands, Sweden, Switzerland, Italy, India and Pakistan.
These double tax treaties set out the taxes that qualify for relief under the agreement, the taxing rights of each country in respect of different types of assets as well as the mechanism for double tax relief where inheritance tax is payable in both countries.
It is important that care is taken to review the appropriate double tax treaty carefully because the personal representatives will need to understand whether relief should be claimed in the UK or abroad.
Where inheritance tax is payable in the UK and a similar tax is payable in a country that does not have a double tax treaty with the UK, double tax credit relief should be available in relation to assets situated in the other country under the unilateral relief provisions.
For these purposes the location of the asset is determined in reference to UK law.
The amount of double tax relief under the unilateral provisions is limited to the lower of (i) the UK inheritance tax, or (ii) the foreign inheritance tax.
In cases where tax is payable in both the UK and another country in relation to an asset that is situated in a third country, or treated as situated in the UK under UK law and the other country under that country’s law, a proportion of the tax may be relieved in the UK.

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.
 
Reduced Rate of Inheritance Tax – Charitable Donations
 
Gifts to registered charities, whether in lifetime or on death, are as a general rule exempt from inheritance tax.
 
In addition, with effect from 6 April 2012 where a person gives 10% of their ‘net estate’ to charity, the estate may benefit from a reduced rate of inheritance tax of 36%.
 
There are specific rules to determine the amount of the net estate for these purposes. Furthermore, assets can be owned in different ways (for example; joint ownership, tenants in common and trusts), and the 10% test must be applied to the different ownership types when considering whether the relief is due.
 
In cases where the 10% test is not currently met it should be possible to either (1) amend the Will during lifetime to increase the amount of charitable gifts, or (2) where the taxpayer is already deceased the personal representatives could enter into a deed of variation within two years of death.
 
In certain circumstances, it may be possible to achieve an overall tax saving by increasing the amount of the charitable gift.
 
However, in the majority of cases this is unlikely to be the case because the benefit of the lower tax rate will be offset by the increased cost of increasing the amount of the donation.

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.
 
Nil Rate Band
 
The amount that may be passed on to a person’s beneficiaries free of inheritance tax is determined by the nil rate band at the date of death.
 
The nil rate band for inheritance tax has been frozen at £325,000 per person since 2010.
 
The Chancellor announced in the Autumn Statement that the amount of the nil rate band will rise to £329,000 with effect from 6 April 2015.
 
Since October 2007 it has been possible to transfer the unused proportion of the nil rate band between spouses, although the benefit of this can only be realised on the death of the second person and not in respect of a lifetime transfer, such as a transfer to trust.
 
Where a person survives more than one spouse, the maximum amount of the nil rate that may be transferred is equivalent to one full nil rate band.
 
However, with careful tax planning, it may be possible for their combined estate to benefit from 3 full nil rate bands. Thus reducing the overall amount of inheritance tax payable.
 
Ideally inheritance tax planning such as this should be undertaken during lifetime through careful drafting of Wills, although it may also be possible to implement the planning post death through a deed of variation.

Inheritance Tax is a thorny subject for families and can affect couples with more than £650,000 of net wealth between them (2012/13 rates).

 For such couples planning to avoid inheritance tax is never easy because there is a balance to be achieved between maintaining a standard of living through the later years and giving assets to younger generations.

 It is never too early to start planning for IHT mitigation; but typically it would be sensible for the process to begin in the late 50s or 60s.

 It is important to understand that capital gains tax can often hamper planning for IHT and so succession planning in relation to property, shares and businesses is important if this is to be accounted for.

 The first stage of planning is to estimate a family’s current exposure to IHT and if this is material some initial ideas can be suggested. It will become clear to the family which ideas are practical and which are not, and then we can focus on the ones which have a chance of practical success.

For an initial consultation please call Eaves & Co on 0113 2443502 to arrange an appointment. We have much experience in this area of tax planning and testimonials are available on our website.

Important Update: See details of Upper-tier Tribunal ruling here
The taxpayers, challenged an HMRC decision to deny business property relief (BPR) on their late mother’s share of a property. The property was let fully furnished as a holiday home.
The case (N V Pawson (deceased) (TC1748)) was heard by the First-tier Tribunal, who accepted the property had been run as a business for the requisite two years before the taxpayer’s death.   It had been profitable for two of the three years before the mother died and the tribunal was therefore satisfied that the business was being run with a view to gain.
It was then necessary for the tribunal to decide whether the business was one that consisted wholly or mainly of the holding of an investment, with the judge concluding that, “an intelligent businessman would not regard the ownership of a holiday letting property as an investment as such and would regard it as involving far too active an operation for it to come under that heading”.
The property was a business asset being used to provide a service and was not equivalent to holding an investment; the taxpayer’s appeal was therefore allowed.
The case will be of interest to taxpayers operating holiday rentals where the activities can be shown to constitute a business.