Inheritance Tax planning requires careful analysis

Seamus McCaffrey, Accountant, Omagh
Seamus McCaffrey, Accountant, Omagh

Inheritance Tax is the tax on wealth held at death plus the value of gifts made in the seven years prior to death.

The rate of tax payable on death is 40 per cent and on transfers within seven years of death: 20-40 per cent. Each spouse has a lifetime exemption of £325,000.

In addition there is the annual gifts allowance of £3,000 per year per spouse and the marriage gifts allowance of £5,000 per parent or £2,500 by a party to the marriage.

In addition to the above allowances there are two major reliefs: Agricultural Property Relief (APR) and Business Property Relief (BPR).

Both of these reliefs represent a 100 per cent reduction in the value of assets which are occupied for the purpose of farming provided there is sufficient evidence to prove that the asset is occupied for trading purposes.

It is sometimes assumed that APR and BPR are the same, except that APR applies to farms.

This is not the case; the reliefs are different. APR applies only to agricultural land and to buildings; BPR can apply to assets of every kind used in a business, interests in a trading partnership and to shares in trading companies.

APR applies only where the land and buildings have been occupied for agriculture as well as owned for a minimum period; for BPR only a minimum ownership period is needed.

This strict requirement providing for a minimum ownership period which, unlike BPR, pivots on the involvement of the transferor for these two periods: two years if the taxpayer farms the land; seven years if the land is farmed by a third party.

It is usual for a claim to both APR and BPR to apply in a farming situation.

For example, many assets of the farming business, such as vehicles, machinery, stock, bank balance, do not qualify for APR but may obtain BPR.

Land and buildings no longer used for agriculture but used in a farm diversification trade, for example, holiday cottages, will not be eligible for APR but, provided a trade is carried on will attract BPR.

Where the market value of farmland and associated buildings is more than the agricultural value, the excess may be eligible for BPR.

Agriculture for APR purposes includes normal livestock, dairying and arable farming.

It also includes woodland if occupied with agricultural land; any building used for the intensive rearing of livestock or fish if that building is occupied with the agricultural land; cottages and farmhouses together with land occupied with them as are of a character appropriate to the property.

The legislation extends APR to apply to the breeding and rearing of horses as part of a stud farm; short rotation coppice and land and buildings dedicated to wildlife habitats.

APR does not apply to woodland not occupied with agricultural land; buildings used for the rearing of birds and fish, though fish farms are eligible, paddocks for ponies used for recreational purposes; farms not occupied for agriculture; agricultural buildings that, by their size, dominate the land rather than being ancillary to the land; farmhouses of character not appropriate to the agricultural land.

Revenue used to argue that a farmhouse and land had to be both in the same ownership and in the same occupation but a Tribunal decision in 2013 in the Hanson case confirmed that what is essential is a link between the farmland and the farmhouse.

Inheritance Tax planning requires in-depth analysis as to how each asset is used in the farm business.

APR and BPR are very valuable reliefs, which, if availed of, can greatly assist in succession planning.