Some key points of proposed tax changes
The Office of Tax Simplification has issued a report to the Chancellor following a review of inheritance tax, so I want to highlight the headline recommendations.
Depending how a farm owner structures their affairs, it is possible to claim Business Property Relief on assets which may not otherwise qualify for relief. This is where trading and investment assets form part of an interest in a single business which is “wholly or mainly trading”.
Under current IHT case law, the term “wholly or mainly trading” has been found to be more than 50 per cent. It is appropriate to look at a number of aspects, including asset values, turnover, profitability, management time spent, the business in the round and historical context to evaluate this. When the overall business is deemed to be mainly balanced towards trading, then BPR may apply to the whole business.
The report recommends a potentially significant shift in the “wholly or mainly” test to align this with the legislation covering capital gains tax. For those purposes, the trading activity needs to be at least 80 per cent of the businesses activities. This could be significant, as if the test is not met then the IHT relief may be withdrawn for the whole or part of a business (except where APR applies for partnerships and individuals) including trading assets that may receive relief ordinarily. Any such business structures should now be reviewed to see how they stand up against this proposal.
Where IHT reliefs are claimed on death – business property relief or agricultural property relief – the normal tax free uplift in value for capital gains tax purposes is not given. Instead the beneficiary inheriting the assets receives them at the original base cost of the deceased. The report suggests this would encourage more lifetime gifting to enable an earlier succession and avoid people retaining assets to benefit from this uplift.
HMRC currently review IHT relief claims for farmhouses where the farmer is absent due to ill health on a case by case basis. The report is recommending that clear factors need to be determined for such situations to make claims more certain. The report does not however state what these factors should be.
The current rule for lifetime gifts is that those made in the final seven years before death are charged in the deceased’s estate, although taper relief may be available for IHT purposes. The report proposes to abolish taper relief and reduce the seven years period to five years.
There are other recommendations included in the full report for smaller reliefs for IHT and gifts out of income.
Roy Jackson, Partner at Whittingham Riddell.