There has been a lot of speculation in recent months as to possible changes to Inheritance Tax (IHT), and whether this might affect farmers and landowners. Some commentators have even said that Agricultural Property Relief (APR) could be scrapped completely. I think this is very unlikely but I do think that changes could be made in the near future.
IHT is an emotive subject, but the amount of tax raised is modest. Out of Central Government tax revenues of more than £700 billion each year; IHT contributes approximately £5 billion – less than 1%! The most recent HMRC statistics for 2015 show that the value of all APR and Business Property Relief (BPR) claims in that year amounted to £1.5 billion. A large amount of money, but again an insignificant amount when looking at total government spending.
The reason for recent speculation was the Chancellor of the Exchequer asking the Office of Tax Simplification (OTS) in January 2018 to carry out a review into IHT. The main focus of this review is on technical and administrative issues, but the Chancellor also asked whether the current framework distorts taxpayers’ decisions.
The effect of 100% APR on let farmland
Since 1995 agricultural landlords can obtain 100% Agricultural Property Relief (APR) on let land. This is only on tenancies which commenced or were varied after 1st September 1995, and where the land has been owned for at least seven years. This contrasts with the owner of let commercial buildings who generally don’t get any IHT exemption on the value of their assets.
Whilst 100% APR on let land is generous, any restrictions or reduction could have unintended consequences. If landowners could no longer receive 100% relief on land let under a Farm Business Tenancy, many would look at alternatives such as short-term grassletting or contract farming. If correctly implemented, 100% APR is still available but the occupier of the land has much less security. It is for this reason that the Tenant Farmers Association has suggested that tenancies have a minimum term of ten years to qualify for 100% APR.
The effect of 100% APR and BPR
We also currently have unlimited 100% APR and Business Property Relief (BPR) where an individual is running a farming business. Whilst there are possible restrictions on relief on farmhouses and where land has development value, this is a big change from a generation ago when relief was only 50%. Land only needs to be owned for two years to qualify for APR in this case. Thus it is possible for a non-farmer to purchase land which they then use for farming purposes, and two years later their IHT bills are greatly reduced.
One consequence of this is that farmers are much less likely to gift assets to the younger generation than in the past. The main reason for this is that where land is inherited it is rebased for Capital Gains Tax purposes. This means that CGT on a future sale is greatly reduced.
Could Working Farmer relief be reintroduced?
Working Farmer Relief was in place until 1981 and required a person to get 75% of their relevant income from agriculture for five out of seven years. In addition, relief was restricted to the higher of £250,000 or 1,000 acres of land. The limit of 1,000 acres was increased for hill ground or rough grazing. A reintroduction of a rule of this kind would make it more difficult for non-farmers to purchase farmland as an IHT shelter. However, some genuine farming businesses who have diversified away from traditional farming in recent years could fail the 75% test.
Possible clawback of APR and BPR?
As mentioned above, land owned on death can obtain 100% APR and be rebased for CGT purposes. This means that a sale of land soon after it is inherited is both IHT and CGT free. The original purpose of APR and BPR was to prevent farmers and business owners from having to sell part or all of the inherited assets to pay the IHT bill.
A recent report by a political think tank – the Resolution Foundation – made several fairly radical suggestions:
That an upper limit of £5 million be placed on APR/BPR claims.
That the minimum ownership period to qualify for APR and BPR be extended from 2 years to 5 years.
That CGT rebasing on death is restricted.
That APR/BPR will only be available if 80% of a person’s estate consists of agricultural or business assets.
Summary
Whilst it is unlikely that most or all of the above changes will be introduced, it would be equally dangerous to assume that the present IHT system will continue for too much longer. As a result, a policy of making lifetime gift of assets could be appropriate for some farmers.
For further advice on Inheritance Tax, please get in touch will Jonathan by calling 01228 690000 or emailing at jonathan.york@armstrongwatson.co.uk. You can also visit our website for more related articles.
