16 Jul 2019

The Office of Tax Simplification (OTS) has just released its long awaited report about reforming Inheritance Tax (IHT) and released a brief video.

Watch the video here.

Farmers and landowners have been holding their breath, concerned that this report may spell the end of Agricultural Property Relief (APR) which is currently 100% of the agricultural value of qualifying assets.

They can breathe a sigh of relief: there’s no talk of abolishing APR.

Not all good news

However, the OTS is proposing a change to the Brander/Balfour/Farmer case, which gives many estate owners 100% Business Property Relief (BPR) on mixed-used estates.

Business Property Relief

OTS recommends the government should review the rules for so-called “mixed businesses” – i.e. businesses which include some trading and some investment activities – and consider whether or not these should be aligned with the Capital Gains Tax rules that apply to those businesses.

Currently, a business can qualify for BPR if more than 50% of its overall activities are trading in nature (rather than investments). This is very helpful for farms and estates where the majority of their activity is farming, but also have diversified income streams such as let cottages, a commercial lease letting out a few farm buildings or let sporting rights. Currently they can all qualify for BPR.

In contrast, under Capital Gains Tax for Entrepreneurs’ Relief and Business Asset Holdover Relief, at least 80% of the overall business has to relate to trading activities, before those reliefs are available. The report recommends that for mixed-use farms and businesses, at least 80% of the activity is trading and not investment activity.

If enacted, this will be a big change. It will require all farms and estates to review what they do on the farm and change their business structures, to set up more limited companies for their non-trading activity.

Capital Gains Tax

When a landowner dies, their value of their land is reassessed to its value at the date of death, rather than the date they acquired it. This is known as a CGT uplift on death.

The OTS want to remove this uplift and recommend that the recipient of the asset which has already received BPR or APR should take over the deceased’s tax base cost – which would mean more Capital Gains Tax to pay if and when a beneficiary sells the inherited asset. The change would encourage more lifetime gifts.

We will monitor developments closely and in the meantime, you can read the full report here.

If you would like to speak to someone about what this means for your farm or estate, then please contact Andrew Williamson.