26 May 1995

Pluses and pitfalls for inheritance tax in new tenancies

By Tim Relf

INHERITANCE tax advantages are available to landowners who replace existing tenancies with new ones after Sept 1, says Joe Richardson, a partner in solicitors Dawson and Co.

"Agricultural property relief at 100% will then be available to the landlord, subject to the other usual conditions being met," he told a meeting of industry representatives in London last week.

Previously, the land – if occupied under the Agricultural Holdings Act 1986 – would have attracted only 50% relief on the death of the owner.

"Some tenants may, however, be reluctant to change their arrangements," he said. "They may be wary of entering into a farm business tenancy even if it contains similar protections to those previously enjoyed."

But the alternative – the landowner entering into a new contract with his tenant before Sept 1, to grant him a tenancy after that date, which still offers the security of the 1986 Act – cannot be relied upon to get full relief.

"So, perhaps the best way of achieving both objectives is to effect a deed of variation over the existing tenancy after Sept 1.

"This may apply, for example, if new land is involved or if the contractual term of the agreement is extended," said Mr Richardson. "In other words the change has to be significant enough to amount to a surrender and regrant, rather than merely a continuation of the old tenancy."

Landowners should also remember that the 100% relief will, in principle, be available to all land let after Sept 1, not solely that let under the new farm business tenancies.

But there are also potential inheritance tax pitfalls in the new arrangements, including:

lLetting land previously in-hand could mean full relief is temporarily lost, as to be eligible a landlord has to have owned it for seven years. (Previously, just two years occupation by the landlord would have sufficed.)

lAgricultural property relief will not apply to the value of any non-agricultural element. (Business property relief on that part can only apply if the landowner himself is involved in the business.)

lAny hope or development value will not attract any relief. &#42