INHERITANCE TAX PLANNING STRATEGIES :
If you have
significant liquid assets, the possibilities are open to invest
in assets qualifying for Business Property Relief (BPR) and use
other quite generous IHT-mitigating schemes. Often, investments
in such schemes will fall out of your estate already after just
two years of ownership rather than after the usual seven.
However, most of
these schemes do carry an added degree of risk which should
not be ignored or dismissed.
including partnership interests, agricultural land, forestry,
shareholdings in unquoted companies (including AIM) and
enterprise investment schemes (EISs), may qualify for BPR but
for many older people whose primary objective is to preserve
their capital and reduce a potential IHT burden, the main
options are typically either an EIS or a packaged AIM portfolio.
investment Schemes [EIS]
EIS schemes can in
some cases be excellent planning tools for wealthier people as
they carry income tax benefits of 30% and a capital gains
deferral at up to 28% in addition the IHT relief after only two
speaking, EISs have been considered high-risk options, but some
providers are beginning to focus on making them less risky for
elderly and/or more cautious investors
It deserved to be
mentioned that even where EIS investments fail, there are
certain income tax reliefs on the 70% capital at stake after the
income tax allowance on the investment. However, it must be
stipulated that that is of course only the case IF the investor
does pay income tax!
Investment Market [AIM] portfolio schemes
These schemes invest
in a selection of shares of companies quoted on the AIM market.
AIM quoted shares
are normally in small companies and are likely to be rather
volatile and can carry a high risk of very significant capital
loss. As such, they are only appropriate for elderly investors
with a very high appetite for risk and significant capacity for
You should also be
reminded that although it normally is easy enough to cash in
your AIM holdings and withdraw your cash if you need to at a
later date, any such action will return the assets back into
your estate again.
Property Relief [BPR] schemes
These IHT mitigation
schemes have the same tax treatment as AIM portfolio services
(i.e. shares fall out of your estate after two years'
ownership), but generally have a lower degree of volatility.
They generally hold
unquoted shares in businesses that are somewhat ‘unexciting’ but
reliable, including farming, forestry, house building and
commercial storage. The minimum investments are normally in the
range of £25,000-£100,000.
Property Relief [APR]
to some potentially significant IHT-advantages, other
perceived attractions of owning farmland include the
lifestyle and often status it confers upon the
purposes farmland is defined as land in the UK occupied
wholly or mainly for the purposes of husbandry such as
the production of cereals, milk, dairy products,
livestock and their products.
For IHT purposes,
farmland is also extended to include ancillary woodlands and any
buildings used in connection with the farming business and the
occupation of which is of a character appropriate to the
farmland. This can include cottages, farm buildings and
farmhouses. Farmland is also extended to include stud farms.
There are two
principal reliefs from IHT, namely Agricultural Property Relief
(APR) and Business Property Relief (BPR). Both of these reliefs,
subject to certain ownership conditions, operate by reducing the
value of qualifying assets liable to IHT.
The current (2012/13
tax year) reductions are as follows:
100% for the
agricultural value of farmland, including farmland under certain
tenancies which commenced after 31 August 1995
50% for the
agricultural value of most other tenanted agricultural land
50% for land,
buildings and certain other assets used in a farming partnership
or company, but owned personally (and not otherwise covered by
agricultural property relief)
The effect of these
reliefs is to remove much farmland from the charge to IHT.
care is needed if the land or farm buildings have development or
amenity value and are owned personally and used by a farming
partnership or company. In these cases, relief may be restricted
to 50% of the development or amenity value and hence the
business structure can be important.
The availability of
APR on the farmhouse is unique, reflecting the close involvement
of the farmer with the business. However, this means that the
appropriateness of the farmhouse in many cases will be closely
scrutinised by HM Revenue and Customs (HMRC).
If for instance, the
agricultural value of the farmhouse is less than the market
value, the level of APR can be restricted accordingly.
To qualify for APR,
the farmland must either:
Have been farmed in hand by the farmer for two years, or
Have been owned by the farmer for seven years and used by
someone else (e.g. tenant) for the sole
purposes of farming.
Land ownership has
often been linked with tenancies in the past, as this allows the
landowner to divest him/herself of the day–to–day management of
the farm. However, the capital tax disincentives have encouraged
new vehicles for carrying on farming on the farmland, such as
share farming and contract farming. Provided that these
agreements are structured carefully, these may allow the
landowner to be treated as a farmer by HMRC while reducing
day-to-day farm management.
It should be
stressed that simply becoming a ‘hobby-farmer’ for the sole purpose
of reducing a potential IHT-liability could be foolhardy and
potentially both very perilous and costly, unless the full
extent of the underlying commitments and regulations are
understood in their entirety.