HM Revenue and Customs (HMRC) has recently commissioned research regarding individuals’ understanding and awareness of various Inheritance tax (IHT) reliefs. The research found that knowledge of reliefs was generally limited and that those who were aware of the reliefs lacked understanding of their limitations.
In particular, there are certain common misconceptions amongst individuals relating to Agricultural Property Relief (APR), Business Property Relief (BPR) and gifting assets.
We’ve chosen three common misconceptions mentioned in the Revenue’s report and explained the potential impact it could have on your estate.
Misconception 1: All agricultural assets attract 100% APR
Not all agricultural assets attract 100% APR. There are two relief rates for APR, being 50% and 100%, that apply based on each particular asset. Do you have a farm business tenancy or an agricultural holdings act tenancy (being a tenancy that commenced before 1 September 1995) on your land? If you do, both of these tenancies attract different IHT rates and may have an impact on your estate’s IHT liability. It is also important that any tenancies you have on your land are written documents that HMRC can clearly identify as being an agricultural asset that is also used for an agricultural purpose. A verbal agreement will not suffice.
The farmhouse is often an asset that farmers believe will attract 100% APR, but this is not true. As APR is a relief that is given to the agricultural value of an asset, the family home is not only an agricultural asset, it is also a home. Therefore the market value of the property may be more than the agricultural value and APR cannot be claimed on the difference between the market value and the agricultural value. To claim APR on the farmhouse it must be considered to be “character appropriate” and therefore consideration would need to be made of the property itself and the people and/or farm workers that reside at the property.
You can see from above that there are limitations with reliefs and by not having an awareness of them and how they impact on your estate could mean your family has an unexpected IHT liability. As many farming estates are ‘asset rich and cash poor’, now is the time to plan for the future to avoid instances where part of the estate may need to be sold to pay the IHT liability.
Misconception 2: All business assets attract 100% BPR
BPR is the relief considered for such assets as the stock, machinery and equipment of a farming partnership. Similar to APR, not all business assets attract 100% BPR. The rate of relief available is either 50% or 100% and this is dependent on the type of asset and who owns the asset being transferred. In addition to the difference in rates, to qualify for BPR the assets must have been owned for a minimum of two years (however this requirement is relaxed for transfers between spouses on death).
With the trend of farm diversification continuing, many farmers now have holiday cottages. This is a particularly grey area for BPR and each scenario would need to be assessed on a case by case basis.
The importance of BPR, as well as other reliefs, cannot be underestimated. By documenting your business to reflect reality could ensure that your estate can benefit from BPR. One example is: ensuring that your partnership agreement is written, it reflects the setup of the business in reality and that your partnership agreement also complements the partnership accounts.
Misconception 3: Gifting assets minimises your IHT liability as the assets then fall outside of your estate
There is some truth to this, but the asset that you gift does not fall outside of your estate’s value (for IHT purposes) until seven years have passed. Within that time the chargeable value of the asset you’ve gifted does decrease on a gradual basis each year after three years has passed from the date of the gift. When making substantial gifts over the current allowance (over the value of £11,300), it is also worth seeking advice in relation to the potential capital gains tax implications of making that gift.
However, each individual has an annual exemption therefore, you can give away £3000 within each tax year (6 April to 5 April) and you will not have to wait seven years for the value of the gift to fall fully outside your estate. A gift within the annual exemption will not affect the value of your estate for IHT purposes. Within a tax year, you may make various other exempt gifts including gifts to charities or normal gifts out of income such as Christmas or birthday gifts or a particular value depending on your estate and standard of living.
In addition to the common misconceptions above, from our own experience in legal practice, it seems that many individuals (especially those in the farming community) have not set up a will or put in place a registered lasting power of attorney.
Not having a will in place could mean that the distribution of your estate will be governed by the rigid intestacy rules. Not having a lasting power of attorney could mean that in the event you were to lose capacity there may be no other person that is able to act on your behalf. This would result in needing an application to the Court of Protection to be able to act on your behalf and this is a lengthy process that is significantly more costly than registering lasting powers of attorney.
As a farmer’s daughter, I understand that there are many considerations to juggle and difficult decisions may need to be made relating to your estate. Thinking about matters and getting the relevant documents in place now will ensure that your estate utilises the reliefs available and that your wishes will be respected and carried out as you would have wanted.
Whether your driving factor is the succession of wealth, preservation of a business or to keep the tradition of your business going, make sure that you do not fall for the common misconceptions and that you obtain legal advice specific to your estate to ensure that your business can continue to run for generations.
For more information, see our wills, trusts and probate team.