Cut inheritance tax bills with new tax relief

Changes to inheritance tax (IHT) rules could make it easier for farmers to pass on their assets tax-free, according to the Central Association of Agricultural Valuers (Caav).

A new tax-free allowance called the residence nil rate band (RNRB) is due to be phased in from April 2017, starting with a threshold of £100,000 for each individual and building to £175,000 by April 2020.

This adds to the existing nil rate band (NRB) of £325,000, which is an IHT-free allowance available on the estate of each individual. The difference with the new band is that it is tied to residential property.

See also: Eight steps for farm succession

The new RNRB offers complete relief from IHT (up to the threshold) on a house lived in by the deceased at any time, provided the net estate is worth £2m or less at the time of death and the house is given to a direct descendant (ie a child, grandchild and so on) or spouse.

It can also be transferred between married couples or civil partners, potentially doubling up the relief on one property.

Caav secretary and adviser Jeremy Moody said that the RNRB could change inheritance planning.

“The world of having to die with your assets might be about to change,” he said at a Caav event in Dorset. “The upside of the RNRB is that the relief is fundamentally objective, whereas agricultural property relief [from IHT] is fundamentally subjective and all revolves around the final two years of your life.”

With a bit of careful planning, farmers can make the most of agricultural tax reliefs, and combine them with the new RNRB to seek IHT relief on their whole estate, says Mr Moody. It can also help with those wanting to step back from active farming and rent their farm out.

“This is powerful incentive to pass assets on well before death to keep your estate under £2m,” said Mr Moody. “You can make over relievable assets, using holdover relief to prevent capital gains tax bills, and use RNRB on either the non-agricultural portion of a house or a separate dwelling altogether.”

How the new RNRB can help a typical farming couple

  • A married couple has a 350-acre farm valued at £3.5m
  • On top of this is a farmhouse worth £600,000 that might not qualify for Agricultural Property Relief (APR)
  • There are other assets worth £400,000 that don’t qualify for APR or business property relief making a total estate value of £4.5m

Solution using RNRB

  • Gift £2.75m of farmland to son / daughter before first death so net value of estate on each death would be £1.75m – ie below the £2m threshold
  • Remaining farmland attracts APR
  • House attracts two lots of RNRB (£350,000) leaving £250,000 taxable plus £400,000 of other assets = £650,000 taxable estate
  • Each spouse has a personal NRB of £325,000 hence reducing taxable value to zero.

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Are you, like many other farms, missing out on tax claims for R&D?

If you’re a limited company, you could be eligible for tax credits if you’re carrying out R&D on your farm. For more information and to find out if you’re eligible visit our R&D tax credits page.

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