One would have thought that the Government in the lead up to and following Brexit, would want to use tax incentives to attract and keep entrepreneurs and farmers in this country but it appears not – it continues to be short sighted; myopically looking at ways to raise revenue regardless of the message it is sending out.
The Office of Taxation Simplification under the guise of simplifying Inheritance Tax seems hell bent on finding ways to increase taxes.
Inheritance Tax, as we know is levied on death. The tax rate is a hefty 40% which is imposed on all value over and above the nil-rate band of £325,000.
When the Government introduced inheritance tax in 1984, it said it did not want to break up businesses or farms on death and so provided an exemption for ongoing trading businesses and farms, called Business Property Relief and Agriculture Relief respectively.
These reliefs are very valuable for the entrepreneur and farmer.
· 16,380 estates over five years (which sounds much more than 3,276 a year) are said to benefit from the relief
· with an estimated £5.98 billion (£1.2 billion per year).
Given that the total tax collected from Inheritance Tax is only £30.4 billion over the next five years this is a significant amount.
Where an estate includes a trading business which qualifies for relief BPR reduces the amount chargeable to Inheritance Tax, either by 100% or by 50%.
One hundred per cent relief, if it is a
· A business
· An interest in a business
· Unquoted shares in a company, including share trades on AIM
Fifty per cent relief if it is
· Quoted shares or securities where the owner has a controlling holding
· Land or machinery owned personally and used in the trade of a company controlled by the owner or a partnership in which that person was a partner.
To qualify the investment must have been owned by the deceased for two years up to the date of the death.
APR is available for the following types of property:
• agricultural land or pasture
• woodland or buildings for the intensive rearing of livestock or fish, where occupied with and ancillary to the agricultural land or pasture
• cottages, farm buildings and farmhouses which together with the land, are of a ‘character appropriate’ to the property
While both APR and BPR might potentially apply to farms, APR is wider than BPR in some respects and BPR in others. APR potentially applies to the farmhouse and to let land, but only applies to agricultural property in the UK, Channel Islands, Isle of Man or an EEA state. This contrasts with BPR, which has no such restriction. Where a property qualifies for both APR and BPR, APR applies in priority.
As for BPR, to qualify for APR, property must generally have been held and used for agricultural purposes for 2 years up to the date of death where the property is occupied by the owner, or 7 years where it is let.
The relief is 100% of the agricultural value if the owner farmed it themselves, or it was let on a tenancy that began on or after 1 September 1995. The relief is 50% in other cases.
The most important exception to BPR is that the business must not consist ‘wholly or mainly’ of holding investments. While the term ‘wholly and mainly is not defined, it is taken to be a test of greater than 50%. This means that where the business has both investments and a trading business, provided the investment is not the main part of the enterprise the entire investment will qualify for BPR.
For Capital Gains Tax purposes, where a business is given away as a gift or sold to a third party, gift holdover relief or entrepreneurs’ relief may apply. For these reliefs, the test for eligibility in relation to companies is not the ‘wholly or mainly’ test but whether there is ‘substantial’ trading activity in the business. HMRC guidance suggests that this will generally involve an 80:20 split of trading vs investment, with several indicators to look at, including assets, income, expenses, time spent by officers or employees, and the history of the business.
The difference between the Capital Gains Tax rules and BPR the OTS says can distort behaviour. This is due to gifts in life being treated differently under the Capital Gains Tax rules from bequests on death, to which the Inheritance Tax rules apply.
The OTS suggests that given the policy rationale for APR and BPR to grant relief to trading businesses, government should consider why the level of trading activity for BPR is set so much lower than the comparable reliefs from Capital Gains Tax.
It recommends that ‘government should, as a package consider whether it continues to be appropriate for the level of trading activity for BPR to be set at a lower level than that for gift holdover relief or entrepreneurs’ relief’. Hmmm – I thought it was just looking at simplification!
If you would like to find out more or you would like to arrange a consultation with Caroline call 020 3740 7422 or write to caroline@garnhamfos.com