Proposed tax reform could accelerate succession planning

Proposed changes to capital gains tax and inheritance tax could incentivise more landowning farmers to transfer assets ahead of death, helping to accelerate succession planning.

The second part of a review into inheritance tax, commissioned from the Office of Tax Simplification by chancellor Philip Hammond, has issued a series of recommendations on how to streamline the way the taxes work.

At present, land that is handed over following a death can often be sold by the recipient without paying capital gains tax or inheritance tax as they are protected by “capital gains uplift” and agricultural and business property relief.

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However, if the property is handed over during the lifetime, with a claim for Holdover Relief, the seller will have capital gains tax to pay on the change in value between its original cost and the sale value.

But the report proposes that the capital gains tax protection on death be removed, so that landowners are no longer incentivised to hold on to assets until death.

This would mean that transfers on death would become the same as transfers during lifetime, said Dodd & Co accountant Rob Hitch.

“If that goes, then farmers will think: ‘Why don’t I just do the transfer now, if it makes sense commercially?’

“However, despite mentioning the problem of double taxation on the sale of assets passed down with holdover, where they are sold within seven years of transfer but before the donor’s death, there is no proposal to remove this pitfall,” he said.

No change imminent

A government response to the recommendations is unlikely to take place until the next Budget, currently scheduled for late November, when Mr Hammond is widely expected to have been replaced in a cabinet reshuffle following the appointment of a new Conservative prime minister.

If implemented, the changes could just be the start of a wider shake-up in the land market, said Mr Hitch, as the removal of direct subsidies under the Agriculture Bill and the fallout from Brexit will also have a significant impact.

“The recommendation to align the trading tests for Business Property relief with those for capital gains tax will blow a hole in IHT planning for businesses that are relying on Balfour principles established in the HMRC v AM Brander case.”

The report also called for:

• The seven-year qualifying period for total inheritance tax exemption to be cut to five years and taper relief to be abolished.
• The trading test for business property relief to be aligned with capital gains tax.
• Consideration to be given to align the inheritance tax treatment of furnished holiday lets with that of income tax and capital gains tax.
• Clearer guidance from HMRC as to when a valuation of a business or farm is required and, if it is, whether this needs to be a formal valuation or an estimate.

The first part of the report, released in December, called for the increased use of technology in administering the tax to simplify the complex administrative burden on bereaved families.

The reports’ changes fall well short of the complete abolition of inheritance tax, which a policy document recently commissioned by the Labour Party called for.

The “Land for the many” policy document, edited by George Monbiot and written by economists and campaigners, sets out ideas to replace the current system with an annual lifetime gifts tax on recipients of assets worth in excess of a lifetime allowance of £125,000, albeit with protections for some farms.

The current agricultural property relief and business property relief are expected to save an estimated 16,830 estates some £357,000 each over the next five years.