A pre-Budget tax warning – All that glistens is not gold

A Report by the Office of Tax Simplification (OTS) in December 2019, also suggesting a reform to IHT, states that out of the 588,000 deaths each year, only 24,500 result in the payment of inheritance tax.

The Report claims that a slash in the current rate of IHT, from 40% to 10%, would benefit those who spread lifetime gifts over a number of years at less than £30,000 per annum. For farmers however, with a Farm valued at £750,000 it would take 25 years to transfer the Farm over to a child, free of tax!

It is fair to say that that the proposals in both Reports, if adopted, will seriously affect the agricultural sector and the way in which farmers, and business owners, structure their succession planning.

Farmers currently benefit from Agricultural Property Relief (APR) on their estate (subject to satisfying certain conditions), and free uplift as regard Capital Gains Tax on death; meaning that they can pass the asset down to the next generation free of both IHT and CGT. Provided the successor has then farmed the land himself/herself for a minimum period of 2 years, or 7 years if rented out, then he/she can sell that holding free of IHT and little or no CGT. The Report states that this can be seen as an injustice and in order to tackle this, have recommended the following:

A. Reducing the current rate of 40% IHT on estate (above the individuals’ allowance) to 10%, or 20% if the gross estate is over £2 million. For example, if an estate is worth £750,000 and the deceased’s allowance was £325,000 the balance of £425,000 would be taxed at 10% = £42,500. The recommendation is that the IHT is paid in equal instalments over a 10-year period;

B. Removing both APR and Business Property Relief (BPR) on death. This could have disastrous implications for farmers. Currently, regardless of the value of the deceased’s estate, where a farm is passed on under a Will no IHT is payable (provided the relevant conditions are met). Under the new regime a deceased estate, comprising in the main of a Farm, would look like this:

Farm valued at £2 million, plus cash and live and dead stock assets of £150,000. Total estate = £2,150,000 less deceased’s allowance (being his £325,000 allowance together with his late wife’s allowance of £325,000 which he also inherited) of £650,000 = £1,500,000. Taxed at 20% = £300,000 IHT bill payable in equal instalments over 10 years ie. £30,000 per year.

C. Not only will farmers have the above to contend with, but the proposals go further and suggests that the estate should not benefit from CGT uplift on death. Should Executors therefore sell the property during the course of the administration of the estate then CGT is to be 20% or 28% of the gain since the deceased acquired the property. Should it pass to the next generation then he/she will inherit the deceased’s CGT liability (valued as at the date of their acquisition) and, should they sell, they will have both liabilities to pay.

The Report goes on further to suggest that a Canadian system should be adopted whereby IHT is scrapped in its entirety and instead CGT only is applied (although increased to 40% to be in line with the current IHT rate);

D. Gifts: Currently, all individuals have an annual personal allowance whereby they can gift a certain amount of money/assets to third parties free of tax. Should they exceed these allowances then, provided they survive the gift by 7 years, the gift falls outside their estate and they have succeeded in reducing their estate in a tax efficient way. The APPG’s preferred option is to tax ALL lifetime gifts (other than those to a spouse or Charity) when made at 10%, subject to a £30,000 annual allowance. The 7-year rule and the tapering tax would both disappear. The 10% charge, where there is a transfer of a Farm, could be paid in 10-year interest free instalments.

Because of the benefit of CGT uplift and APR on death, many Farmers have been content to leave their Farm, lands and farming assets to their child or children in their Wills. Should however the recommendations be implemented (which could come into place immediately), Farms left in a deceased’s estate and distributed under his or her Will will be subject to IHT at either 10% or 20% on any amount above their allowance (this will be either £325,000 or £650,000). In addition, CGT liability will be passed on to the estate and inherited by the beneficiary.

The Report sets out the likely impact of the proposals on the public, and confirms that as regard the impact on the “very wealthy, with business and/or agricultural assets” the revised position would move them from a “little or no tax position” into a “significantly more tax, but spread over 10 years” position with “limited scope to reduce tax further with lifetime gifts”.

Although we do not know what, if any, of these recommendations shall be implemented, reform is looking increasingly possible and we would suggest that anyone who has put off transferring the farm or business to the next generation takes urgent and immediate advice, and where it is deemed appropriate and feasible, that the transfers are effected prior to the Budget in March.

Please feel free to contact a member of our team to discuss further or seek advice as to the above either before or after the Budget.

Lydia James Partner & Head of Private Client Agri Advisor February 2020