New IHT Family Home Allowance
A new monthly record for the amount of Inheritance Tax taken by HM Revenue and Customs was set this April. The take of £397 million stands well in excess of the average monthly take of £260 million over the last ten years. Furthermore, the Inheritance Tax of £1 billion collected by HMRC for the three months to the end of May is the highest figure for any three month period since 2007, when £1.1 billion was taken in the three months to the end of August.
Although the government has announced reforms which it says should reduce the Inheritance Tax burden, some commentators believe that the proposed reforms are too complex and could distort the housing market.
As currently proposed, a new 'family home allowance' of £175,000 per parent will be added to the current individual IHT tax-free allowance for bequests made to children or grandchildren which include a main home. As a spouse or civil partner can pass on their tax-free allowance to their spouse or civil partner, this means that the IHT tax-free threshold can therefore rise to up to £1 million for estates including a main home left to children or grandchildren by a married couple or civil partners.
The basic IHT tax-free allowance of £325,000 is otherwise unaffected by the proposals.
Some commentators have observed that the proposals would add unnecessary complexity to the system and be of benefit only to those whose wealth is tied up in the family home.
It has also been noted that that as the proposals do not appear to apply to lifetime gifts, they may have the effect of deterring elderly people from downsizing for fear of increasing the amount of Inheritance Tax due on their estates. This could lead to some elderly people feeling that they are effectively trapped in houses that are now too large for their needs. Moreover, a reluctance on the part of elderly people to downsize could put further pressure on the already stretched supply of family homes in many parts of the country.
It is believed that there will be some restrictions on the proposed allowance, with the maximum amount of the family home allowance being reduced on a sliding scale for estates worth between £2 million and £2.35 million. Estates worth £2.35 million and above would not benefit from the allowance.
Critics of the proposals say that a better, simpler and fairer way to reduce the IHT burden would have been to increase the tax-free threshold for all estates.
It remains to be seen what effect, if any, the cost of implementing the current proposals might have on other IHT reliefs, but concern has been expressed that pressure may be put on other important IHT reliefs such as agricultural property relief and business property relief.
What is a family investment company?
These tax changes mean that many trusts no longer offer the tax-efficient benefits they once did. With this in mind, individuals are being urged to consider other options, which include using a plc to pass down assets to other family members.
With a family investment company (FIC), the shareholders are other family members. Large amounts of cash can be invested tax-free into the company, which can be used by the family members as a means of generating income. Gifting shares in this way is treated as any other gifting, in that the transfer is completely free of tax and the gift itself will remain completely free of inheritance tax liability, should the donor survive for at least seven years after the date of gifting.
If all profits are retained within the company, no further tax becomes payable.
Family investment companies may not form the best tax-efficient solution for everyone, however. For example, farming families may automatically be eligible to receive business property relief or agricultural property relief, in which case a trust may be more suitable.
If you would like to know more about the advantages and disadvantages of family investment companies, or would like to discuss your personal needs and objectives in more detail, contact the IWC estate planning experts, who will be able to help.
Inheritance tax reliefs come under scrutiny
Farmers are being warned to be exceptionally well prepared, with news that inheritance tax reliefs will come under further scrutiny by HMRC.
Criteria surrounding tax breaks including Agricultural Property Relief (APR) and Business Property Relief (BPR) is likely to become much stricter, following an investigation by the National Audit Office.
This means that in order to qualify, farming families must be extra vigilant on how they structure and operate their businesses, before, during and after the retirement and death of the principal farmer.
One of the key criteria for qualification of these tax reliefs is that the main farmer must be shown to be still farming or at least managing the farm when they died. "Retired" farmers will continue to attract IHT on their final estates. In addition, the main farmer must also be in residence in the main farmhouse at the time of death, for the estate to qualify for relief.
Although a popular choice among many farmers today, giving land over to a renewables project could result in that land being no longer viable for any reliefs.
Another popular tactic among farming families has been to convert redundant farm buildings into other businesses such as holiday accommodation, cafe or leisure activities. Converting these buildings into spaces suitable for a non-agricultural business may also have an adverse effect on any relief which may otherwise have been granted.
It's worth bearing in mind that government schemes, consumer trends and demands may ultimately guide a farming business through the decision of whether to diversify. However, professional farm succession planning advice should be sought before any decision is made, to ascertain any effects on the final amount of IHT which must be paid.
How much Agricultural Property Relief can I claim?
if a farmer actively runs or manages a farm up to the time of their death, then their estate will usually be awarded 100% Agricultural Property Relief. Generally, this means that no Inheritance Tax is due for the value of the agricultural land or the main farmhouse itself.
In many instances of course, the farm will form part of an estate, with workers' and holiday cottages also situated on the land. If more than one inhabited house is connected to the farm, then it is unlikely that these other properties will be included within the APR, although there may be other ways of minimising the Inheritance Tax payable.
With farming businesses having been forced to diversify to supplement income over the last few years; bed and breakfasts, leisure villages and office space have become commonplace. These additional businesses may attract Business Property Relief, reducing Inheritance Tax liability even further.
It is worth noting that the Inland Revenue employs specific criteria and measurement tools to classify whether the deceased was indeed still active in the running of the farm in the time leading up to their death.
The tax implications of retiring from farming can cause substantial confusion, leading farming families to make the wrong decision.
If there is no-one willing and ready to take on the family’s farming business as a natural succession, then the current farmer must decide whether to sell the farm, rent it out as a Farm Business Tenancy or continue running the farm, using hired workers to help out. If the farm is to be passed down however, the farmer should then consider passing it on through a formal sale, rental or gift.
What must be remembered however is that Capital Gains Tax (CGT) will be charged on the value of the farm, if it is sold or gifted, although reliefs may be available, depending on the individual circumstances.
Inheritance Tax (IHT) implications could also come into play, particularly if the farm is gifted and the farmer dies within seven years of making that gift.
Agricultural property relief and business property reliefs may be made available to reduce the inheritance tax liability, should the farm be sold or rented out.
With such complicated financial guidelines and legislation surrounding taxes, reliefs and farm succession, it is vital that planning should be in place well in advance.
When I’ve spoken about farmland and agricultural property relief in the past, I’ve always advised the same thing, in order to qualify. The owner of the farm must remain within the farmhouse and ensure that the land continues to be farmed either by themselves, a member of the family or an employed farm manager or farmhand.
What we haven’t considered however, is what happens in the unlikely event when the property and the land are owned by different people.
Unlikely it is, but this was the case recently with a farmer, who took HMRC to several tribunals, to contest the removal of APR on a farmhouse which his family had owned for over 100 years.
HMRC’s position was that by interpreting the initial principles of inheritance tax, it was essential that to apply for relief, both the land and property must be owned by the same individual.
After appealing to both the First-Tier and Upper Tax Tribunals, the farmer’s adviser revealed that the Inheritance Tax Act 1984 used the word “property” rather than “estate” and that HMRC’s interpretation had been incorrect.
Happily, the court concurred that the farmhouse was “of a character appropriate to the land” and awarded the man his APR, no doubt leading to many future appeals of a similar nature.