According to a recent Daily Telegraph article about the political parties’ upcoming election agendas, Labour is planning a “devastating” multi-billion pound inheritance tax raid, which could affect family businesses and in particular farming families.
Ahead of the general election, which is said to be likely in the autumn next year, the Labour Party, in setting out its stall; it is considering scrapping or curtailing two existing tax exemptions – business and agricultural property relief. These exemptions from IHT currently allow smaller businesses and farm businesses to be passed down to future generations without a large penalty, thus avoiding the 40 per cent inheritance tax (IHT) charge.
This article applies primarily to England and is not a full interpretation of the law, only the courts can decide. Although tax laws are similar in other jurisdictions, there may be significant differences. Always seek professional advice before making or not making important decisions.
The Party's proposed changes to inheritance tax have sparked concerns within business, farming landowning and investing communities. The potential implications of these alterations, particularly focusing on the Business Property Relief (BPR), are significant for some businesses, AIM shareholders and landowners.
The move is part of a concerted plan by Labour to scrap a number of tax reliefs in what has been called a “loophole closing exercise”, one which the Party believes could raise as much as £4bn, that’s according to The Times newspaper.
Labour, it seems, in contrast the rumours circulating around Tory plans to reduce or even abolish IHT, has set its sights on a significant increased reach for inheritance tax. This move that has sent shock-waves through the farming and family business communities.
The party, it is said, is mulling over the elimination of there two key exemptions: agricultural and business relief. These exemptions currently shield farms and family businesses from the hefty 40% inheritance tax take when passing a business on to the next generation.
In the United Kingdom, the inheritance tax (IHT) rate stands for individuals stands at 40%. It's noteworthy that the nil rate band, the threshold at which IHT becomes applicable, has remained the same at £325,000 since April 2009. Meanwhile, average house prices in the UK have surged by up to 85% during a similar period, based on the Land Registry UK House Price Index.
In specific regions, such as the South East and Greater London, property prices have witnessed even more remarkable increases, surpassing 100% and nearly 115%, respectively.
Over the past decade, an increasing number of property portfolios have fallen under the purview of IHT, especially for larger portfolios, resulting in heightened exposures.
A property investment (company) business typically will not qualify for IHT relief. Consequently, the entire value of shares in a property company investment in say buy-to-lets is vulnerable to IHT upon the owner's demise. This situation can lead to a significant erosion of a family's long-standing wealth.
When property portfolios are held within a company structure, the need to secure separate funds to cover tax liabilities often arises. Additional tax charges may ensue if these funds are raised through such means as dividend pay-outs. In the worst cases, the company might even need to undergo liquidation to meet its tax obligations.
Other options for lifetime planning are restricted anyway: capital gains tax liabilities will typically arise when shares in a property company are gifted. Transferring more than £325,000 in value into a trust also usually triggers immediate IHT payments.
These tax liabilities can be significant and need to be addressed at an early stage. IHT planning for property businesses primarily will concentrate on preventing the tax exposures to become too great, so expert guidance should always be sought in good time.
In most instances, property classified as holiday "business property" can qualify for full 100% relief from inheritance tax once it has been in ownership for a minimum of two years. Consequently, if you own a holiday let property, at the time of your passing, its value will not factor into the calculation of your estate's taxable amount for inheritance tax purposes under the existing rules.
Moreover, there's the option to make gifts of business property of this kind during your lifetime, bypassing the customary requirement for the recipient to survive the gift by seven years, as long as the property continues to serve a business purpose under its new ownership.
Formerly, HMRC recognized that Furnished Holiday Accommodation (FHA) could be eligible for business property relief, provided the owner was somewhat involved in the business's operations. However, in November 2008, HMRC made a subtle alteration to one paragraph in their Inheritance Tax Manual without advertising the fact. They stipulated that unless “substantial” supplementary services were provided alongside the fundamental ones like cleaning and laundry, FHA would no longer be considered business property for inheritance tax relief.
HMRC's reasoning behind this change was that owning and managing FHA was akin to "holding investments," similar to a personally held buy-to-let business, a category of investment businesses that do not qualify for business property relief.
It may well be argued that operating a property portfolio, it comes under the umbrella of the "investment" exclusion. But FHA - when occupants change on a weekly or fortnightly basis, and thorough cleaning and preparations are necessary for each change of guest – this requires considerable involvement of the landlord in providing these substantial services. This is the view of many of those operating this type of business and is their argument for the relief.
Under existing regulations, agricultural properties can be fully exempt from IHT, and while business property relief not only safeguards family firms from inheritance tax, it also offers tax planning opportunities for those who invest in Alternative Investment Market (AIM) shares and currently those entities that invest in agricultural landlord for carbon off-setting.
This latter is seen as loophole which Labour have in their sights for closing, but it is not clear at this stage if their plans extend to the whole range of exemptions.
Labour see a large disparity in inheritance tax liabilities between wealthier individuals and middle-class families, in part due to these business and agricultural exemptions. Wealthier individuals, often with a range of diversified investments, including farmland and other businesses, can take advantage if these IHT reliefs, while middle-class families, with most of their wealth tied up in their family homes, cannot enjoy these same tax benefits, it is argued.
However, experts are warning Labour that abolishing these reliefs could force families to sell businesses, they would the argue, it would discourage investment in new businesses and AIM shares, and cause real hardship in struggling farming families, were farms would have to be sold to cover hefty inheritance tax bills.
In the cut and thrust of the pre-election political arena, there is speculation that the Tory Party may be planning to either scrap inheritance tax altogether or increase these tax allowances. The Daily Telegraph, alongside more than 50 Conservative MPs, is actively advocating for the elimination of this tax duty.
Agricultural Property Relief is said to save farm business around £1 billion annually, allowing farmers and investors in farmland to pass this on fee of death duties. Business Relief allows families to claim the tax relief when inheriting a family business, its assets or shares in a company.
A spokesperson for The National Farmers Union (NFU Mutal), Sean McCann, has highlighted the potential repercussions if this relief is removed, stating that it could spell disaster for traditional family farms. Many farming families are struggling to make a decent return on their farm investments as it is now, imposing such a burden on these families could undermine the long-term viability of English farming for future generations and food production, it is argued.
In a similar way, it is said, abolishing Business Property Relief would dis-incentivise business owners and future investment in business, and potentially forcing the follow-on generation to have to take on a very significant amount of debt to cover the new tax burden. This would be money diverted from new investment in business growth, job creation, and the economic growth of the country as a whole.
The changes to Business Property Relief would adversely affect investors with shares in unlisted companies, potentially prompting an exodus from AIM shares, something the Tory Government has been been at pains to discourage.
In addition to the proposed changes to IHT relief, Labour is looking at the possibility of removing business asset disposal relief. This tax relief allows individuals owning more than 5% of a company to pay a reduced tax amount when they sell their stake in the business.
The Labour Party have refused to reveal the exact timing of when their in-full IHT tax proposals will be unveiled, but reports have suggested that this will be prior to any announced election date and that the anticipated proceeds from such a move would be used to help finance their election campaign and pre-election initiatives.
Those who advocate scrapping these exemptions argue that this will primarily affect only those wealthy individuals whose estates involve farmland, businesses, and other substantial investments. But Government agencies in the past have recognised that both Agricultural and Business Property Relief are “vital for the continuity of farms and businesses across generations.”