By Lydia James - Partner
The beast known as Inheritance Tax has again morphed following the introduction by the Conservatives of the Residential Nil Rate Band (RNRB) and despite the good intentions of Mr Osborne there appears to be much uncertainty as to who can benefit from it, including how and when. I shall endeavour to clarify and correlate against the current regime for farmers including Agricultural Property Relief (APR).
An individual’s allowance for inheritance tax purposes is currently £325,000 and the rate of Inheritance tax that is due and payable on an estate in excess of this allowance is 40%. The allowance doubles up to £650,000 for married couples and civil partners (not co-habitees), who pass on their wealth to the surviving spouse/civil partner on death and have not used any of their allowance themselves.
The additional RNRB is being introduced incrementally and an additional £100,000 per person is available for 2017/18. A further additional allowance will be added year on year until 2020/21 by which time the total amount will be £1million provided that strict conditions have been complied with.
There is however a sting in the tail in that it will only apply to estates worth less than £2m. If an estate is valued above this, then the available RNRB will be reduced by £1 for every £2 that the estate is over £2 million. This is likely to cause problems for farmers as the legislation is clear that it is the ‘gross estate’ that must be considered when valuing the estate. It would appear therefore on the face of it that a large proportion of farmers will fall foul of this and will not be able to claim the RNRB if the gross value of their farm and other assets is more than £2 million.
The key relief for farmers remains to be APR and, subject to conditions, 100% will be available. The position is not however as straight forward in relation to farmhouses which must pass the ‘character appropriate’ test. This provides that:
(1) The house must be in the centre of the farming operations and the occupier must be actively involved on a daily basis. This poses difficulties to elderly farmers and those trading on their own and not in partnership;
(2) It must be occupied with its surrounding farmland and proportionate to the acreage involved. For example, if the farmhouse is quite large, but the land is being used by a family farming company, the relief may not be applied.
Although the new RNRB should be welcomed it must also be treated with caution as it is not going to be universally available and must not be relied upon. In so far as farmers are concerned, it is of course another weapon in the armoury which, together with agricultural property relief and business property relief, and a sensible succession route, can ultimately mean that tax efficiency can be achieved. Advice however needs to be taken about their inheritance tax position, as it is easy to lose the benefit of some of the reliefs.