Background

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 the value of those assets may be relieved from inheritance tax. The relief applies to reduce the value of the assets for inheritance tax purposes by 50% or 100%, depending upon how the assets are held. Inheritance tax is payable at 40% only on any net value after the reliefs.

These are therefore valuable reliefs for land and rural businesses and you should take advice to ensure that your assets are structured and used in order to qualify. These reliefs allow rural businesses to pass on to their families and continue running without parts having to be sold to pay off an inheritance tax bill.

HM Revenue & Customs has recently published the results of research into the use of the reliefs. The research concludes that the reliefs are being used for their intended purpose of avoiding businesses and estates being broken up to pay inheritance tax. However, the research may be a precursor to a review of the reliefs, which are a cost to the Treasury.

If the assets were to be sold or if the direction of the business were to change in such a way as to no longer qualify, then the reliefs would be lost.

You should consider whether it would be wise to bank the inheritance tax reliefs while they are available.

Banking the reliefs

You could bank the inheritance tax reliefs now by making a lifetime gift of them to your beneficiaries. 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 or their marriage breaks down and family assets are included in a divorce settlement. You could instead protect the assets from such risks by making the gift not to individuals but to a trust for them, which allows the beneficiaries to have access to the assets but without placing anything directly in their hands. A trust provides flexibility to change your mind about who the ultimate beneficiaries are, depending upon the circumstances. You could retain control over those decisions by being a trustee.

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. In this way, while the reliefs are available, you can remove the value of assets from your own estate and put into a trust without financial limit. 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.

You could bank the inheritance tax reliefs by instead 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 leave those assets to your spouse then the reliefs are wasted as there is a spouse exemption from inheritance tax for anything left to them. You could therefore consider leaving the assets to your children, for example and they would inherit the assets inheritance tax free. If you have concerns about asset protection then you could leave the assets. not to specific beneficiaries, but in 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 asset 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 by changes to the inheritance tax regime. While the results of the research carried out for HMRC may be positive, the research may be a precursor to a review of the reliefs, which are a cost to the Treasury.

You should give careful consideration to the availability and potential use of the inheritance tax reliefs for your land and rural business.