Posted on 3 Jan 2019

Inheritance Tax Relief: Uncertainty Growing with the Impending OTS Consultation

Earlier last year the Chancellor of the Exchequer asked the Office for Tax Simplification (OTS) to carry out a review on aspects of Inheritance Tax (IHT) in order to identify simplification opportunities. Following the end of the Consultation the OTS has published its response in relation to various administrative recommendations, but the more interesting issues have been left to be addressed this year. 

Although the Consultation was intended to be wide-ranging, concerns have been raised amongst the agricultural community that many issues identified by the OTS relate to farmers and agricultural property relief (APR).   

Under the spotlight? 

The Consultation raised specific questions about whether the existing IHT framework distorts decision-making in relation to:

  • whether and when to sell or transfer the farm to another vehicle or to the next generation, or downsize during one's lifetime, or wait until death
  • the choice of letting out farmland versus farming in-hand or via a contract farming arrangement
  • the inhabitants and use of the farmhouse
  • the choice of business vehicle for the farm (e.g. company or partnership)
  • the structure of the business (for example, whether to diversify or hold non-trading assets).

It also asked what, if any, complexities arise from the fact that business property relief (BPR) and APR overlap, at least in part and whether it would be helpful if APR was replaced with BPR or if the two were merged.
The existing IHT system (particularly APR and BPR) provide key reliefs for farmers that allow them to transfer farming businesses across generations without fragmentation in ownership. We would caution against radical changes to the existing IHT framework applicable to farmers.  Although there are complexities to the system, these are relatively well understood by advisors and many of those that rely on the reliefs.
Whilst we would welcome genuine simplification of some rules (such as those applicable to farmhouses) it does not seem correct that there should be any wholesale changes to the IHT system under the guise of 'simplification'. Any fundamental changes should be part of a broader policy review if unintended consequences are to be avoided. 

Uncertainty ahead

Reading between the lines, the Consultation seems to indicate that amongst other things, there is a risk the OTS may conclude tenanted farms should no longer qualify for APR on existing terms and/or APR should be abolished in its entirety in favour of a refined version of BPR. Any changes along these lines would be significant and could have a very detrimental impact on farmers at a time when they have other pressing concerns, such as the removal of the current farm support system and increasingly tight margins. 
Although there have been rumours around changes to the APR rules for many years, we recommend that farmers pay particular attention to the outcome of this, more significant part of the Consultation.  If changes are recommended or announced then it may be necessary to revisit existing structures to ensure tax efficiency going forwards.