Farmers and their families will most likely be aware of the important Inheritance Tax (“IHT”) reliefs currently available on the value of their businesses. Agricultural Relief (“AR”) and Business Relief (“BR”) can relieve the full value of the farming operation and it has long been recognised that the policy objective behind these reliefs is to prevent the breaking up or sale of farms (and other businesses) on death.
Broadly, AR is available on the agricultural value of farmed land, buildings, woodlands or pasture as well as farm cottages and farmhouses which are “of a character appropriate” to the property. The agricultural property must have been held and used for agricultural purposes for at least 2 years where occupied by the owner or 7 years if occupied by someone else. The rate of AR is 100% of the agricultural value if the owner farms himself or the land was let on a post-1 September 1995 tenancy (50% relief otherwise). Commonly, value not relieved by AR may instead be covered by 100% BR on the basis that the business of farming is a trade.
Following consultation, the Office for Tax Simplification (“OTS”) published an initial report in November 2018 setting out their views on various issues and complexities associated with the current IHT system. Amongst the issues raised were AR and BR and the lack of clarity and consistency with which the rules may be applied. Concerns were also raised in relation to whether the availability of these reliefs led taxpayers to hold on to farms and other businesses until death rather than transferring them to the next generation during lifetime. Evidence from the consultation suggested that the reliefs were generally operated in a straightforward way with only a few specific areas requiring simplification. These areas included relief for furnished holiday lettings, the lack of clarity on AR in the case of partially retired farmers and the administrative burden of having to claim the reliefs.
It is perhaps surprising then that the most recent report from the OTS on IHT reform, published on 5 July 2019, explores the possibility of complete withdrawal of AR and BR. This has been tempered with the suggestion that this significant change could be coupled with a global reduction in the rate of IHT, although the extent to which the rate could be reduced is unclear.
Even if the reliefs are not removed entirely, the OTS has recommended aligning the accepted definition of what constitutes trading as opposed to investment between the different taxes. At the moment, a business is regarded as “wholly or mainly trading” for IHT (and therefore BR) purposes based on a 50% test. The Capital Gains Tax (“CGT”) equivalent “substantial” trading test is a more restrictive 80:20. Whilst the OTS could of course have suggested upwards alignment of the CGT test, the recommendation instead is that the appropriate test for IHT is lowered. Many land owners who have in recent years diversified their business activities whilst being careful to remain on the right side of the 50% BR test, may soon find themselves on the opposite side of this line.
As noted above, one of the main areas of uncertainty for an ageing farming population is the criteria for AR availability on the farmhouse where the farmer reduces his involvement in the day to day running of the business and is possibly forced, due to ill-health, to move out of the farmhouse. A welcome suggestion in the latest report is that the tests should be simplified and more transparent, however how exactly this will be effected has not been explained.
It remains to be seen whether any of the proposals made by the OTS on the future of AR and BR will be implemented. What is clear however is that farmers and other business owners should be mindful of the suggestions and how they might impact upon the succession and taxability of their estates going forward and therefore it is important to seek advice from specialist advisors.
By Lisa Tait, Tax Senior Manager at Anderson Anderson & Brown LLP
To find out more about Lisa and the Business Advisory Team, click here.