The starting point
Inheritance Tax (IHT) is payable at 40% of the value of what you own when you die – over and above the nil-rate band allowance, available to every individual, of £325,000 (we will ignore the Residential Nil Rate band for the purpose of this article). There are, however, two notable exceptions to this if you should own, for example, a working farm or a particular type of business. In these instances it may be possible to reduce the value of any such assets for IHT purposes or to exempt it from IHT altogether. Depending on how the assets are owned, their value could be reduced by either 50% or 100%. However, if other assets are owned that would put your estate over the threshold, some IHT may still be payable at the usual rate of 40%.
The findings of a recent review by HMRC show that Agricultural/Business Property Reliefs are being used for their intended purpose – preventing family businesses from having to be broken up and sold off to pay IHT bills. However, the research may also be a means of the Treasury assessing how much revenue it is missing out on and could be a precursor to a review of the Reliefs, which are a substantial cost to the Treasury. So, in the event that such Reliefs are done away with at some point in the future, is there anything that can be done now to ensure that we can benefit from them while they’re still available? The answer to that is yes.
Future – proofing your reliefs
We know that the results of the research carried out by HMRC show that Agricultural and Business Property Reliefs represent a very positive thing for Joe Public. We also know that, due to the substantial cost to the Treasury, those very same results may mean that the days of the Reliefs are numbered. So, what if there was a way to preserve the benefit of the Reliefs while they’re still available so that they can be utilised at such a time when they may not be available anymore?
Given the nature of business assets, during our lifetime we may not wish to risk passing them directly to our intended ultimate beneficiaries in case their circumstances change which may jeopardise their ability to continue to own the asset; divorce, for example. Such potential pitfalls could be avoided by instead gifting the asset to a trust for their benefit, allowing the beneficiaries to access to the assets but without them having beneficial ownership. This setup also allows time to amend, if necessary, who ultimately owns the trust asset if circumstances change over time. Control over this type of decision can be retained by you being one of the trustees.
Gifts in to trust are usually restricted to a value of £325,000 every seven years. However, if the asset qualifies for Agricultural or Business Property Relief no such restriction applies. So, where applicable, IHT can potentially be mitigated altogether even if the reliefs were later made obsolete by the Treasury. This is because, as long as you live for seven years after making the gift, its value will be cease to be counted as part of your estate for IHT purposes and, ultimately, pass to your intended beneficiaries free of IHT.
If you feel that you may own assets that qualify for either Agricultural or Business Property Relief, you should seek advice to ensure that the asset is being run in the correct way to ensure that it meets the qualifying criteria. Your accountant should be able to assist you in this regard. Having established that your assets qualify, we would be delighted to offer bespoke advice on how best to implement the right type of trust to preserve your Agricultural and/or Business Property Relief.
If you would like an appointment with one of our Consultants or if you have further questions regarding a Consultant visit, please telephone 01732 868190 or click here.