Innovative solutions to reduce inheritance tax exposure

For those landowners who allow a windfarm to be developed on their land the resulting income stream is likely to be very welcome. This may especially be the case where the windfarm site was previously of low value and unlikely to produce a meaningful income. In turn the new income stream may radically increase the underlying value of the land. While this too will be a welcome development, the increased capital value may markedly increase the landowner’s exposure to inheritance tax.

The traditional way in which to reduce this exposure is for the landowner to transfer the land to other family members prior to the development being undertaken and while the land is still of a low value. While such planning can be effective in reducing the risk of a large tax charge arising on the landowner’s death, it also raises issues concerning loss of control and the fact that in passing assets to other family members, the landowner is likely to have to give up a substantial portion of the new income stream. Given that this income may have been the main driver behind allowing the development in the first place, this may not be welcomed.

Due to this issue, attempts have been made to develop a structure that will allow the landowner to reduce his exposure to inheritance tax while retaining his income stream. One possible structure is for the landowner to enter into partnership with the developer rather than simply letting the land to them. The thinking behind such an arrangement is that it may qualify for business property relief and therefore make it wholly exempt from inheritance tax.

While there has yet to be a definitive ruling that such an arrangement will qualify for business property relief, the possibility that a partnership structure (rather than simply letting the land) may lead to relief is likely to result in increased interest in such structures.