The Office of Tax Simplification (OTS) has published its report on the simplification of inheritance tax (IHT). It was asked by the Chancellor to review a wide range of technical and administrative aspects of IHT back in January 2018. Among other things, the latest report looks to “address distortions in operation and scope of reliefs such as those for business and agricultural property”.
Many businesses and farms currently qualify for either or both full Agricultural Property Relief (APR) and Business Property Relief (BPR), the rationale of these reliefs being that this helps prevent sale or break-up of the business to finance IHT payments. The government can choose which of the proposals made by the OTS should go forward but, given the scope of this report, it seems probable that the current rules will be subject to some change.
Included in the latest proposals are that:
- Government should consider whether it should be appropriate for the level of trading activity for BPR to be set at a lower level than for capital gains tax (CGT) reliefs. The current threshold for BPR is a ‘wholly or mainly’ test, but aligning this with CGT reliefs would in effect ‘raise the bar’ to an 80% trading test.
- The rules around lifetime gifts should be simplified by creating an annual allowance, reducing the seven-year period required before gifts are exempt from IHT to five years and abolishing taper relief.
- The CGT uplift that occurs on death if an IHT relief or exemption has been claimed should be removed.
- Government should review the appropriate treatment of Limited Liability Partnerships for the purposes of BPR trading requirements.
- HM Revenue & Customs (HMRC) should review its current approach around the eligibility of farmhouses in “sensitive cases”, such as where the farmer needs to leave the farmhouse for medical treatment or to go into care.
- HMRC guidance as to when a valuation of a farm or business is required should be clearer and, if required, whether an estimate rather than a formal valuation is sufficient.
- Consideration should be given to aligning the IHT treatment of furnished holiday lets (FHLs) with that of income tax and CGT.
Some of these proposals, such as aligning the Furnish Holiday Letting IHT treatment with that of income tax and CGT would provide welcome clarity and simplicity for the taxpayer. Other proposals, such as raising the bar for the level of trade that businesses need to be undertaking before they can claim BPR would be challenging, especially for those rural businesses that rely on this relief as part of their long-term succession planning, albeit solutions exist to limit the damage of moving to an 80% test.
A removal of the uplift in the base cost of assets on death if an IHT relief or exemption has been claimed would require a fundamental review of many taxpayer’s wills and associated succession planning.
There is a lot to consider in the report and much that could impact on rural and farming businesses. We will be watching the next steps closely as government decides which of these recommendations it may endorse and take forward as the consequences are far reaching for future generations.