There is currently a, very generous, 100% relief from inheritance tax for passing on businesses and farmland during lifetime and on death. The rationale for Business Property Relief (BPR) and Agricultural Property Relief (APR) is to enable businesses to be passed on without the need to sell off assets to pay the IHT due on the transfer.
If a business is wholly, or mainly, for the purpose of investment it is not eligible for Business Property Relief (BPR). This is not always straightforward to determine. Many estates include both trading and non-trading business assets, so establishing if this test is met can be hard. This ‘wholly or mainly’ test is generally considered to be a greater than 50% test and the OTS are suggesting that the test should be aligned with the much stricter 80:20 test that applies for CGT gift of business asset holdover and entrepreneurs’ relief. If introduced many more business transfers would be liable to IHT.
What assets qualify for APR?
Provided strict conditions are met, the following assets qualify for the relief:
- Agricultural land or pasture
- Farm buildings
- Farm cottages
- Farm houses
How do you get 100% relief?
You should get the maximum rate of relief if:
- You have the right to vacant possession at the date of your death (and the date of the gift, if appropriate).
- You could have obtained vacant possession within the next 12 months.
- If the land is let, you could have obtained it within the next 24 months.
- If you cannot obtain vacant possession within these time scales then the rate of relief is 50%. The remaining 50% will be caught within the Inheritance Tax net.
On the positive side the OTS have recommended that IHT business property relief should be extended to include Furnished Holiday Lettings aligning the tax treatment with that of Income Tax and CGT where they are treated as “trading” providing that certain conditions are met.