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Proposed changes to IHT and how that affects farmers

View profile for Caroline Dowding
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Proposed changes to IHT and how that affects farmers

The Tax Simplification Office has reported the need to overhaul the complex tax system under which we currently operate. The All-Party Parliamentary Group for Inheritance and Intergenerational Fairness has published a report recommending the abolition of Inheritance Tax as we know it, and introducing a simplified version of the tax system.

Currently, everyone has a Nil Rate Band allowance of £325,000 that can be left free of Inheritance Tax before tax is paid. This sum will be reduced if, during the 7 years before death, you give lifetime gifts. The NRB can also be transferred between spouses. Anything over and above the personal allowances available are taxed at a rate of 40%.

What makes the IHT system complex is the additional reliefs that have been tacked on over the years when new governments make promises, which are then implemented when they come into power.

Agricultural Property Relief and Business Property Relief are integral to this point, meaning that assets used for the purpose of agriculture, and business assets, can be exempt from IHT in their entirety when the threshold is met. The current Capital Gains Tax rules also mean that there is a tax-free uplift on death, which rebases to the value of the asset at the date of death.

For our farming clients, these reliefs are invaluable to enable farming business to be able to remain intact on the death of an owner, and enable the business and its assets to pass down the generations as has been done for hundreds of years.

So what are the proposed changes to Inheritance Tax?

Firstly, there is a desire to change the way lifetime gifting is taxed. Currently, gifts are taxed if you pass away within 7 years of the gift, and reduce the available NRB on death. 

However, there is no limit on the amount of gifts that you can make. The proposals are to keep lifetime gifting and death separate, in that the gift will have no impact on the NRB allowance on death. 

They wish to introduce an annual gift allowance of £30,000. If anything is gifted above that sum, there would immediately be a tax charge of 10% of the value over and above the annual gift allowance. This could cause problems with farming clients wishing to gift assets to the next generation during their lifetime.

Secondly, there is a proposal to reduce the tax charge from 40% to 10%, or 20% if your estate is worth over £2m. Whilst on the face of it this would seem positive, we also note that here are proposals to scrap both APR and BPR.

Whilst, as now, the IHT could be paid over a 10 year period, this will put a huge financial strain on a business, and the tax due may far outweigh the income generated on the farm, meaning that in reality land may need to be sold to settle the IHT due. It may also not be financially viable to pass on the farming business.

In addition to this, there are plans to scrap the free uplift in the value of an asset at death for Capital Gains Tax, meaning that assets could be acquired at a low base cost, and if it was ever to be sold, there would be a substantial CGT liability due on that asset.

Whilst a simplification in the tax regime would be welcome, the real impact on the abolition of APR and BRP would affect farmers in real terms, as well as the ability to pass on the family business.

Whilst such changes are likely to be years in the making, it is important to keep abreast of changes, and not take for granted that the current tax structure will always be in force.

If you need assistance with tax planning, please contact our specialist Agriculture and Estates team

I am based in our Colchester office and can be contacted on 01206 217394 or caroline.dowding@birkettlong.co.uk

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