14 February 1997

After election 100% tax relief may go: Act now

WITH the general election only weeks away, now is the time to take advantage of current tax reliefs.

"The 100% agricultural and business property reliefs for inheritance tax are historically unusual and widely believed to be too good to last," says Jeremy Heal, partner with Norwich solicitors Howes Percival.

"Various members of the Labour Party have indicated they view the present 100% reliefs as loopholes, overgenerous benefits which ought to be stopped or restricted.

"But by acting now, not only can you preserve the exemptions, but you do not even have to survive seven years – your action is effective, even if you die straight afterwards.

"The basic principle is that now is the time to give away business and agricultural property that qualifies for 100% relief. And if you are not yet certain who to give it to, consider setting up a trust."

But Mr Heal warns that, while you may still be able to control what you have given away by use of a trust, you must give up the right to take any future benefit from the property you havegiven.

So what should you give away? A range of property now qualifies for 100% agricultural or business property relief, including:

&#8226 A business or an interest in a partnership.

&#8226 Most farmland and appropriate houses and cottages.

&#8226 Unquoted shares in trading companies (including farming companies).

To qualify, these assets must have been owned for two years.

But deciding who to give them to is often a difficult question, especially as many people feel their children are not yet ready to receive outright gifts. "A trust is a very useful pot to hold assets in, if you have not finally decided to whom they should go," says Mr Heal.

For tax purposes, they can be divided into two types:

&#8226 A discretionary trust – in which trustees are given the property and told they can distribute the income or capital at their own discretion among a list of beneficiaries.

&#8226 A fixed interest or interest in possession trust – in which one person (the tenant for life) has a right to the income.

Quite often a trust will provide for the income to go to the life tenant for his or her life. After that, the capital is to be held on discretionary trusts and given to whoever the trustees think fit.

But which type of trust should you choose? "Some people prefer trusts to be very specific, others prefer flexibility," says Mr Heal.

But for tax purposes, there are some important differences.

"A gift to a discretionary trust is one of the last remaining occasions where inheritance tax is actually charged on a lifetime gift. This means that the 100% relief is completely used at the date of the gift and should therefore be safe against any later change in the law.

"This also has a capital gains tax consequence. Because a gift to a discretionary trust is theoretically taxable (even though the rate may be nil), holdover relief for capital gains tax is always available. In other words, if you want to give property which is standing at a capital gain to your trust, the tax can be deferred until the trustees ultimately sell the property."

But a gift to a fixed interest trust is treated as a potentially exempt transfer. "In other words, you wait and see whether the donor dies within seven years. If he does, you add the gift back into his estate when calculating the inheritance on his death," says Mr Heal.

"Such a gift should be safe, because the current rule is that, if the donor dies, you look at the tax reliefs at the date of the gift. In other words, you should be able to claim 100% relief. However, some people believe this could be attacked by a change in the law.

"Furthermore, a gift to an individual (or a fixed interest trust) has an important trap if the donor dies within seven years. The property which was given must not have been sold by the donee, or the relief will be lost. This is another argument in favour of using a discretionary trust."

Jeremy Heal of Howes Percival says trusts are the best way of preserving tax reliefs.