When someone dies their estate has to be valued for Inheritance Tax (IHT). It is also necessary to take in to account gifts that the deceased may have made in the last seven years of their life. IHT may be payable at 40%, depending on the net value of the deceased’s assets. However, if the assets of the estate or lifetime gifts involve agricultural or business assets then they may be eligible for favourable treatment which will reduce the amount of IHT payable due to two different reliefs that can apply.
As you would expect, Agricultural Relief (AR) will apply to qualifying agricultural assets and Business Relief (BR) to qualifying business assets. Where there is a farming business, and so both types of relief may be able to be applied, AR is applied first. These reliefs can help save substantial sums of money and avoid the need for the farm or business to be sold in order to pay the IHT due on it given the value of some of the assets which may be suitable for AR or BR to be applied.
How much tax can be saved with AR and BR?
The relief can reduce the value of the asset by as much as 100% of the value. For both AR and BR there are two rates of relief, 100% or 50%.
In relation to AR, most qualifying agricultural assets will generally have the benefit of 100% relief unless the deceased was not in possession of the asset or did not have the right to obtain possession within 12 months of the transfer or death.
In the case of BR it depends on the type of business asset as to whether it will attract 50% or 100% relief.
The business or agricultural asset must generally be owned by the deceased for two years to be able to qualify and must not be subject to a binding contract of sale at the time of the deceased’s death.
Does any agricultural asset qualify for relief?
Given the generous nature of the relief and to avoid abuse of it, there are strict requirements in order for agricultural assets to qualify for AR.
Agricultural property is agricultural land or pasture used for the rearing of livestock or fish and may also include woodland and buildings provided their occupation is ancillary to that of the agricultural land or pasture. It is also necessary that the buildings, such as cottages, farm buildings and farmhouses are of a character appropriate to the land.
The market value of, for example a farmhouse, may be higher than the pure agricultural value of the house. In which case AR only applies to the agricultural value.
What about business assets?
The following types of business assets are able to qualify for relief at either 100% or 50%:
1. the business of a sole trader – 100%;
2. the interest of a partner in a business – 100% relief;
3. unquoted shares in a company (including shares listed on AIM) regardless of the size of holding – 100% relief;
4. unquoted securities of a company controlled by the deceased/transferor immediately before the death/transfer – 100% relief;
5. quoted shares or securities of a company controlled by the deceased/transferor immediately before the death/transfer – 50% relief; and
6. land, buildings, plant or machinery which, immediately before the death/transfer, was used wholly or mainly for the purposes of a business carried on by a company of which the deceased or transferor had control or a partnership in which he was a partner – 50% relief.
The business must be carried out for gain and must be a trading business so cannot be an investment business, otherwise relief is lost.
The rules relating to BR and AR are complicated and so the above is very much an overview. Therefore, in each instance where IHT may be reduced by the application of BR or AR it is necessary to look at the facts relating to those particular circumstances.
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