IHT Relief withdrawn for older farmers
Sounds alarming doesn’t it but that iseffectively what the Capital Taxes Office are doing.
Those farmers owning land and property who live too long effectively risk losing their Inheritance Tax Relief at the most important moment – when they pass on. That is the outcome following HM Revenue & Customs successful appeal against the Atkinson Case. Those that may recall the Atkinson Case will be aware that the executors of a deceased farmer were successful in arguing that the residential farm property the farmer occupied on the farm prior to a short period of dependence on nursing care continued to qualify for Agricultural Property Relief at the date the farmer died. Under Inheritance legislation, for Agricultural Property Relief to apply to a farm house, the house must be occupied with land for the purpose of farming throughout the two years prior to death.
The Capital Taxes Office sought to argue that because the farmer had to move out of the house and in to nursing care, for the last period up to his death the house was actually unoccupied for the full two year period. The executors of the tax payer put forward the argument that because the house was still being used by the business as an office and it was available for the farmer to use, should he return from nursing care, relief would still be extended on the basis that it was still being used in the business. At first this stance delivered a successful outcome but regretfully the Court of Appeal has overturned the decision on the basis that the property was not being properly occupied in the sense of occupation for a residential period throughout that two year period.
What does this mean for farmers generally? Well if the elderly farmers continue to occupy the farm house and particularly the principal (and therefore likely to be the more valuable property), unless they can guarantee that they will continue working up to the very day they die, there is a risk Inheritance Tax Relief will be denied when they do eventually pass on. Regretfully don’t expect any concession from the Tax Office or any sympathy by virtue of the fact that someone was actually in nursing care and therefore old and frail. The Tax Office simply look at the facts of the case and decide whether relief is available or not. Likewise, the fact the deceased may have lived in the farmhouse all their life is irrelevant too. The last two years is all that is relevant.
There are solutions to this problem but they do require firm action by the tax payer. Firstly there is always the option to pass the whole farming assets down a generation in good time and prior to death. One needs to be careful to ensure that the gifts are valid and that benefits are not reserved. This is often a problem if people want to continue living in a house that they give away, where to make the gift valid a rent at market rate must be paid. However, if the gift takes place at the time of moving out of the main farm house that facilitates a proper and ordinary transfer which can be protected without the need to pay rent if the donee takes up occupancy.
Those that worry about the security of assets should they give them away should consider the use of trusts as an alternative to outright gifts to protect the assets during their lifetime. It is normally very simple to structure these things tax efficiently and have it such that the trust is wound up after the donor dies. At least that way the older generation are guaranteed not to see the assets squandered in their lifetimes.
Finally, remember that for those who feel confident that these issues won’t affect them, remember that all farmers who own farm houses have to prepare for a significant element of the value of the farmhouse not attracting Agricultural Property Relief. Following the Antrobus II case which is now etched in to the annals of Inheritance Tax (IHT) history, Agricultural Property Relief (APR) only applies to the agricultural value of a farmhouse which in many cases is considered to be some 70% of the actual open market value. The extra 30% is therefore potentially subject to IHT. For example, a farmhouse worth £1m on the open market could add £120,000 of IHT duty even in the most genuine of farming cases. Is that a legacy you want to leave the next generation?
For more information please contact Mike Butler on 01935 709301 or mike.butler@oldmillgroup.co.uk