Aerial view of farmland with arable fields, hedgerows and woodland© FLPA / Roger Tidman/REX/Shutterstock

Farmers and landowners should review their succession plans, say advisers, as the government in turn reviews how inheritance tax (IHT) works.

The Office of Tax Simplification (OTS) has issued a call for evidence and launched a survey on IHT, having been asked by Chancellor Philip Hammond to examine the regime and how it may be simplified.

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While accountants are extremely cautious about the likely outcome of the review, they say this is a good prompt for farming families to review their IHT position, succession and retirement plans.

Agriculture benefits from up to 100% relief from IHT on qualifying assets through agricultural property relief (APR), with the result that proper organisation and planning can mean no IHT is due on many farms and estates.

Scope of the Office of Tax simplification review

  • The process of submitting IHT returns and paying any tax
  • Gifts rules including the annual threshold for gifts (up to £3,000 with no IHT due), small gifts, their interaction with each other and the wider IHT framework
  • Other administrative and practical issues of routine estate planning, compliance and disclosure
  • Complexities arising from the reliefs and their interaction with the wider tax framework
  • The scale and impact of any distortions to taxpayers’ decisions, investments, asset prices or the timing of transactions because of the IHT rules, relevant aspects of the taxation of trusts, or interactions with other taxes such as capital gains tax
  • The perception of the complexity of the IHT rules among taxpayers, advisers and industry bodies

“It’s a very benign regime for agriculture and if people are minded to leave assets to the next generation, then it may be best to do so before people start changing the rules,” said Rob Hitch of Cumbria accountant Dodd & Co.

In almost every Budget of the past 20 years there has been a degree of nervousness about possible changes to IHT reliefs.

While much of the Chancellor’s target was the administration of the tax, there was perhaps a warning shot for landowners, said Mr Hitch, referring to the OTS also looking at how gift rules interact with the wider IHT system.

Inheritance tax facts

  • Introduced in 1988, replacing capital transfer tax
  • Charged at 40% but only on any value above the personal ‘nil rate band’ of £325,000 for an estate
  • Raises about £5bn/year
  • Annual gift exemption of £3,000 (same for past 30 years)
  • Agricultural property relief and business property relief offer up to 100% relief from IHT

It will also consider whether the current framework causes any distortions to taxpayers’ decisions surrounding transfers, investments and other relevant transactions.

Even if a farmer or landowner does not expect to make changes in terms of passing on assets, it is good practice to regularly review and understand what the tax position would be in the event of a transfer or a death.

The more diversified a business is, the more important it is to perform such a review, as diversification can take assets outside of the scope of APR, although business property relief (BPR) may still be available, also at up to 100%.

Carlton Collister of tax adviser landtax said farmers and landowners needed to be aware changes were likely as a result of the review. “It is speculation at this stage what form those changes might take and the timescale,” said Mr Collister. “However, If one considers any changes to the current favourable tax treatment for APR and BPR are likely to detrimental, the timetable for the consultation reporting back in the autumn provides a reason to carry out succession planning that is currently being worked on before the date of the autumn budget.”

The budget is expected in late November or early December and while the OTS will make recommendations, the Chancellor is responsible for final decisions on tax policy.

The OTS wants to hear from anyone with experience of the system including farmers and their advisers.

Advice on inheritance tax reliefs for farmers and landowners

Eligibility for agricultural property relief (APR) depends on assets qualifying – in general this means that they must have been owned and occupied and used in agriculture by that owner for at least two years. Alternatively they must have been owned for seven years and may have been used by another person for agriculture during that time.

Where APR is not achievable, then business property relief (BPR) may be available but accountant Saffery Champness warns that entitlement to BPR can be jeopardised when land or property is let.

Two cases from 1999 and 2010 determined that where more than 50% of a property consists wholly or mainly of making or holding investments, that property would fall outside the scope of BPR.

Furnished holiday lets are often denied IHT relief as they are deemed primarily to be investment businesses unless a certain level of service is included in the lettings.

There has also been a number of cases relating to caravan parks, grazing land and commercial property and in most of these the taxpayer’s BPR claim has failed unless there is evidence of a significant related trading element, warns the firm.

Saffery Champness also cautions not to make significant changes without checking out whether these may affect the position with regard to other taxes.

How to respond

Email ots@ots.gsi.gov.uk or write to: Office of Tax Simplification, Inheritance tax review, Room G/41, 1 Horse Guards Rd, London SW1A 2HQ