The Office of Tax Simplification (OTS) has recently published an online survey to gather information about people’s views of inheritance tax. While the OTS is not interested in tax rates or tax reliefs, but rather in how we are asked to report and pay the tax, it was quickly followed by a report by the think-tank Resolution Foundation. This suggests that any inter-generational gap in wealth could be corrected via an overhaul of inheritance tax, including a tightening up of reliefs for land and rural businesses.
Inheritance tax is payable at 40% on the value of what you own when you die.
However, if you own agricultural or business property, for example farmland or an interest in a business, then a relief may apply to reduce the value of the assets for inheritance tax by 50% or 100%, depending on how the assets are held.
These are therefore valuable reliefs for land and rural businesses. You should take advice to ensure that your assets qualify. The reliefs depend upon how ownership is structured and what the assets are used for.These reliefs allow rural businesses to be passed on to your family and to continue running, without having to be sold to pay an inheritance tax bill. They also allow an inheritance tax-efficient restructuring of a business.
You should consider whether it would be wise to bank the inheritance tax reliefs while they are (still) available, particularly if you are looking to restructure the business, for example if a new partner or shareholder is coming on board, or if someone is retiring from the business.
Banking the reliefs
You can bank the reliefs in one of four ways:-
- Make a lifetime gift to your beneficiaries. You may wish to do this via a restructure, for example by taking someone into the business and giving them your interest. The reliefs can allow you to do that without inheritance tax. If the reliefs were later to be lost, then so long as you survive for seven years after making the gift, their value will be removed from your estate for inheritance tax and they will still have passed on to your beneficiaries inheritance tax-free.
- Make a lifetime gift to a trust. Given the nature of business assets you may not feel comfortable about passing these directly into the hands of individuals, for example in case they prove to be unable to drive the business forward. You could instead protect the assets from such risks by passing it to a trust. When you make a gift to a trust you are restricted to gifting a value of £325,000 every seven years but if the inheritance tax reliefs apply, then there is no such restriction.
- You could bank the inheritance tax reliefs by leaving assets to your beneficiaries in your will. The advantage of this option is that you retain access to the assets during your lifetime.
- If you have concerns about asset protection then you could leave the assets to a trust under your will. Your spouse could be a beneficiary of the trust, after your death. This would allow your spouse access to the assets if required.
Changes in the reliefs
There may be something to be said for using or banking the reliefs as they are now, in case they are later reduced or removed.
You should give careful consideration to the availability and potential use of the inheritance tax reliefs for your land and rural business.