My qualifications allow me to become quite deeply involved with some of my client’s affairs and development as part of on-going relationships with many, which has benefits for us both. The main benefit is an overall knowledge of their properties, objectives or past projects which enables me to advise them better and flag up any potential conflicts or issues. One of the hardest conversations to have, however, is that between generations relating to inheritance tax planning, dealing with death and assets and payment of potential taxation.
I cannot stress the importance of taking professional advice in relation to tax planning and management of your assets. Tax is wide ranging so this is a brief discussion and one which should be followed up with professional advice if you have any specific queries.
My planning and valuation work often has tax implications and whilst I am not a tax advisor, I can (and do) flag up potential issues which need further consideration and specialist advice. Examples of my interaction with taxation are:
- Gaining a planning consent which could improve the value of an asset (but the increase in value, or the entire asset, could then be exempt from Agricultural Property Relief (APR));
- Valuations for Capital Gains Tax (CGT) with gifting of property or land;
- The obvious one, valuations for the administration of a deceased’s estate (probate).
Inheritance Tax (IHT) is a tax at 40% over a low threshold. The basis of charge is Market Value as defined in section 160 of the Inheritance Tax Act 1984. Many estates have nil rate bands which are £325,000 at 0% and this is transferable between spouses and civil partners. There is then a residential nil rate band amount where the house lived in is owned and given down the family. This is £175,000 at 0% and is transferable for spouses and civil partners. It is, however, tapered away for net estates above £2million. Up to £1million can be at 0% for spouses*.
For rural estates there are exemptions and reliefs which can be very, very important but they depend on facts at the date of death. Exemptions can include transfers between spouses and civil partners, potentially exempt transfers (PETs) and conditional exemption (heritage assets). These may sound simple enough, but some caution is needed. Use of PETs freezes value, diminishes tax after three years and no tax is due after seven. If someone dies prior to seven years after the gift – a tax liability under IHT could be due if there are no exemptions such as APR available. Transfer of an asset could also create a CGT liability. The timing could mean a more tax efficient transfer or an unfortunately/badly timed double taxation nightmare.
Key reliefs for farms and estates include Business Property Relief (BPR), Agricultural Property Relief (APR) and Woodland Relief. There are very large volumes of case law which affect the application of these reliefs. It is key to ensure you are familiar with the qualification requirements for both if you intend to utilise them as part of your estate planning. Whilst you can only plan based upon the rules at the time, it is also important to ensure you can evidence the necessary things at the point of claiming such a relief. It is important to “get your ducks in a row” and keep good paper trails of the facts of the case and actions taken.
Reliefs such as APR are available on agricultural value only. Gaining change of use on those redundant barns could increase their value and make them wholly taxable for IHT. Increasing value, then disposing of an asset (including transfer to a relative) could create a CGT liability. It is clear that in considering such projects, the impact on taxation needs to be taken into account. The timings of transfers and planning applications can, in some cases, mitigate the level of tax payable depending on the valuation dates.
So, if you take one thing away from this short article? Consider what the tax implications are for any projects you are planning and take professional advice. The cost of that consultation or slight delay in a transfer whilst you check something, could quite literally save you thousands.
*Please note this is correct as at the time of writing, however, this article should not be utilised as a substitute for formal, qualified, advice – it is intended for general information purposes only.