The OTS recently published its second report on the simplification of inheritance tax, which makes recommendations to streamline gift exemptions, simplify lifetime gifts and address distortions in the way Agricultural Property Relief (APR) and Business Property Relief (BPR) operate. A review of the recommendations indicates significant change for the rural community.
The report concludes that the interaction between inheritance tax and capital gains tax (CGT) impacts decision-making and delays the transfer of wealth to the next generation. When a person inherits an asset on death, the CGT value is uplifted to the market value at the date of death, which means that the inherent capital gain does not get taxed and the asset can be sold after death, tax free. If that asset also benefits from APR/BPR (or spouse exemption) there may also be no inheritance tax to pay. This enables the beneficiaries to continue operating the business with no need to sell assets to fund tax liabilities. This combination has enabled the transfer of the business to the next generation in a tax efficient manner.
The report concludes that the current rules inhibit the transfer of assets in lifetime and alter decision-making. The proposed solution to this, is to remove the uplift for CGT on death when an exemption such as APR/BPR applies. This means that it is no more beneficial to transfer on death than it is in lifetime, significantly increasing the tax take longer term. The loss of the CGT uplift on death could provide uncertainty and restriction for the next generation in making essential changes to the business. It is also worth noting that CGT rates have been low for more than 10 years and are unlikely to be reduced. An increase in CGT rates in the future, coupled with a loss of rebasing on death could be extremely punitive so a review of your arrangements now is highly recommended.
Other proposals in the report are to align the trading qualification criteria for BPR and holdover/entrepreneur’s relief. This will mean a harsher test for BPR qualification from the current 51 per cent to 80 per cent trading. This will impact those rural businesses relying on Balfour principles and those diversifying to combat subsidy and Brexit challenges. Finally, the report indicates a review of the eligibility of farmhouses for APR where the farmer needs medical treatment or goes into care.
The well-advised rural business should now be considering their position in advance of the November Budget.