Review of inheritance tax reliefs

Farmhouse in the UK
Donald-Drysdale By Donald Drysdale for ICAS

4 December 2017

Research on APR and BPR heralds no imminent changes.  Donald Drysdale wonders why it has been published now, and suggests that practitioners should proceed with caution.


Practitioners poring over Budget announcements issued on 22 November might easily overlook a document, apparently unrelated to any Budget measure but released quietly the same day.  It is entitled The influence of inheritance tax reliefs and exemptions on estate planning and inheritances’.

This was the outcome of HMRC-commissioned qualitative research into the motivations, behaviours and attitudes of individuals on the use of reliefs and exemptions from inheritance tax (IHT).  The independent researchers, IFF Research, sought to understand estate planning decisions by testators owning agricultural or business assets, the influence of IHT reliefs generally, and what beneficiaries do or intend to do with inherited assets.

The research involved a mere 80 interviews among testators and beneficiaries owning agricultural or business assets and agents who advised on agricultural property relief (APR) and/or business property relief (BPR).  The results are not statistically representative of the wider population.

An avoidable tax

Inheritance tax is often described as a voluntary tax.  There are many ways in which it may be avoided legitimately, and such opportunities are most readily available to the wealthiest taxpayers.

An obvious, simple strategy to reduce exposure to IHT is to plan ahead and make generous lifetime gifts, without reserving any benefit, thereby reducing the taxable estate on death after the passage of at least a further seven years.

For those who possess qualifying assets, APR or BPR offer an attractive alternative strategy.  Subject to detailed conditions, these reliefs may allow ownership, control and related income to be retained until death while still providing IHT relief, often at 100%.

APR is given on agricultural assets, e.g. farmland, farm buildings, farmhouses etc.  If occupied by the owner, a company they control, or their spouse or civil partner, the assets must have been owned and used for agricultural purposes for fully two years before the chargeable event, i.e. the death or a lifetime transfer. If occupied by someone else, they must have been let for at least seven years.  The relief is usually at 100%, although only 50% in some circumstances.

BPR is given on certain qualifying types of business and business assets.  Relief is at 100% for an interest in an unincorporated business, or shares or securities in an unquoted company.  It is only 50% on quoted shares that give control of a business; or on land, buildings or machinery used by a business and owned by a partner or controlling shareholder; or in certain other circumstances.  The assets must be owned for fully two years before the chargeable event.

APR and BPR facilitate transfers from generation to generation, protecting farming concerns and other businesses by shielding their proprietors or controlling shareholders from IHT liabilities which might otherwise force them to sell or liquidate.  By helping businesses to continue, the reliefs are contributing to the maintenance of employment, productivity and economic growth.

It is a widely held view that APR and BPR serve a crucial role in relieving IHT where the tax charge might otherwise do much harm.  However, it is arguable that in some cases the reliefs may help to sustain businesses which are not making best use of resources, and might otherwise be replaced by others which would do so more effectively.

What the research found

Testators and beneficiaries interviewed were aware of the basic principles of IHT, but few were aware of APR and BPR.  Most practitioners felt that clients with relevant assets were aware of APR or BPR but that many assumed (sometimes incorrectly) that all their agricultural and business assets would qualify for 100% IHT relief.  Where relevant, clients had higher awareness of APR than BPR as a result of sector-specific communication within the agricultural community.

Estate planning generally involved keeping the testator’s possessions intact, to be passed on to family members on death, except where there was no appropriate beneficiary or alternative arrangements were made to fund retirement.  Preserving a business was often a key factor, and reducing IHT payable on the estate was frequently a secondary consideration.

Agricultural assets were commonly steeped in tradition and sentiment.  Testators were usually unwilling to part with them during their lifetime, and tended to focus on successfully passing all assets on to the next generation.  Practitioners explained that farming businesses often became unsustainable if broken up.

As well as providing for their family, owners of other businesses – especially large businesses – felt obliged to preserve the business beyond their death to financially support their staff.  However, it was less common for an interested beneficiary to continue the business (compared to agricultural businesses).

Professional advice on APR and BPR centred on restructuring estates to ensure that all relevant assets qualified and that the reliefs were maximised.  Where qualifying assets were purchased, it was usually for genuine commercial purposes and rarely specifically to make use of the reliefs.

Where trusts were used it was usually to ensure that assets were managed or distributed in a specific way after death.  Some of those interviewed mentioned tax advantages of trusts, but usually in the context of capital gains tax rather than IHT.

Among testators and beneficiaries interviewed, some of whom were or had been represented by practitioners, APR or BPR came up in a few cases.  Among practitioners, these reliefs were commonly encountered and were a central focus of the advice provided.

Lingering questions

Cynics may believe that HMRC published this research as a harbinger of changes in IHT reliefs and exemptions – perhaps even the scaling back or abolition of APR and BPR – but this seems unlikely given the very light sampling used.

There has always been a danger that APR and BPR are seen as too generous, allowing wealthier individuals to invest in ways that enable large landholdings and businesses to be handed down the generations free of IHT.  This was touched on in July in a House of Commons Briefing Paper, other aspects of which were covered in my article Tax: What shape should IHT be?

Politically, anything could happen.  Political parties’ views on IHT vary widely, ranging from increased tax rates on large estates at one extreme to outright abolition of IHT at the other.

What if the law changes?

Practitioners advising on estate planning need to recognise that nothing is carved in stone. Some commentators argue that the two reliefs should be combined, meaning that the detailed rules would inevitably alter.  Wealthy clients owning farms and other businesses could be disproportionately affected by changes.

Fundamental questions need to be considered. How should assets be held? Which generation should hold them?  Should business assets be owned inside or outside the business?  How would any change in estate planning strategy interact with other taxes, notably capital gains tax?

We don’t know whether any changes will be proposed in the near future.  So we can’t tell what the vital questions will be – let alone being able to guess the answers.  But practitioners need to understand that their clients’ long-term plans could be crucially affected.

Article supplied by Taxing Words Ltd


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