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In the fifth of a series of extracts adapted from his eBook 'Hutton on Estate Planning' (3rd Edition), Matthew Hutton looks at Inheritance Tax (IHT) Business Property Relief (BPR) and Agricultural Property Relief (APR).

Outline Description

These reliefs are given in most cases at 100%, and are generous indeed. It has been a major surprise that successive Labour Governments did not between 1997 and 2010 seek to reverse the rate increases introduced by a Conservative Government in 1992. The rules for both reliefs (Business Property Relief and Agricultural Property Relief – BPR and APR) are complex, covered in Chapters 6 and 7 respectively. In each case one must determine the type of property which qualifies and the time it has been owned or (in the case of agricultural property) occupied – generally two years. Neither relief is given if, at the date of transfer, the property is subject to a binding contract for sale (IHTA 1984 ss 113 and 124). Certain types of business or agricultural property attract relief at only 50%. 

Business Property Relief

(a) 'Relevant Business Property’

The property must, wherever in the world it is situated, be (IHTA 1984 s 105):

• a business, or an interest in a business, which must be carried on with a view to profit;
• unquoted securities which confer control, either by themselves or with any other unquoted securities or shares;
• any unquoted shares;
• a controlling holding of quoted shares;
• land or buildings, machinery or plant used in a business by a company controlled by the deceased, or by a partnership of which he was a partner; or
• land or buildings, machinery or plant owned by trustees and used in a business where the deceased had an estate life interest. 

(b) Period of Ownership

The taxpayer must have owned the relevant business property for at least two years, subject to relieving provisions for replacement property and for property inherited on the death of a spouse/civil partner (IHTA 1984 ss 106, 107 and 108).

(c) Rate of Relief

100% relief will be given for the first three categories above, otherwise 50% (IHTA 1984 s 104). Shares in AIM companies are treated as unquoted companies.

(d) Type of Business

The business must not be wholly or mainly an investment or a dealing business (IHTA 1984 s 105(3)). Generally speaking, BPR is given only to trading businesses. Accordingly, a business of owning property which is let residentially or commercially will generally not attract BPR. Some businesses will be ‘mixed’, comprising a number of different elements. Relief will be given only if the trading side predominates.

(e) Excepted Assets

There may be some assets in a qualifying business which constitute ‘excepted assets’ (IHTA 1984 s 112). These will be excluded from relief where broadly not used in the business, nor required for future business use. The proprietor of a business cannot simply ‘park’ spare cash, surplus to business requirements, in the business and necessarily expect to get BPR on all the cash.

Agricultural Property Relief

(a) 'Agricultural Property'

This is defined as (1) agricultural land or pasture; (2) woodland and buildings used for the intensive rearing of livestock or fish, if the occupation of the woodland or building is ancillary to agricultural land or pasture; and (3) cottages, farm buildings and farm houses together with their land as are ‘of a character appropriate’ to the property (IHTA 1984 s 115(2)). The agricultural property must be situated within the EEA (or, in cases where tax was paid or due before 23 April 2003, restricted to the UK, the Channel Islands or the Isle of Man). A controlling interest in a farming company will also attract APR.

(b) The Occupation or Ownership Test

The deceased must have occupied the agricultural property for agricultural purposes for at least two years, or must have owned the agricultural property for at least seven years, with continuous occupation by someone for agriculture (IHTA 1984 s 117). There are reliefs for replacement of property within that period and for property inherited on the death of a spouse/civil partner (IHTA 1984 ss 118 and 119).

(c) Rate of Relief

The rate is 100% if (IHTA 1984 s 116):

• the deceased has vacant possession, or the right to obtain it within 12 months (24 months by concession) after his death – had he survived;
• the deceased had owned his interest in the land since before 10 March 1981 and would have been entitled to the old ‘working farmer’ relief from CTT, with no right to vacant possession since then; or
• the deceased was the landlord of a tenancy commencing on or after 1 September 1995.

Otherwise, the transfer will attract only 50% relief, typically where he is the landlord of property let under a tenancy under which he does not have the right to get vacant possession within 24 months.

(d) 'Agricultural Value'

APR is given, not on the market value of the property (like BPR), but on the ‘agricultural value’ only; this presumes that the property is subject to a perpetual covenant prohibiting non-agricultural use (IHTA 1984 s 115(3)). District valuers have been using this to argue for a discount of up to one-third on the market value of the farmhouse, with support from the October 2005 Lands Tribunal decision in Lloyds TSB (as personal representative of Antrobus deceased) v IRC, under reference DET/47/2004.

A Comparison of Business Property Relief and Agricultural Property Relief

BPR is given only, broadly, to businesses which, or shares in unquoted companies (including AIM companies) which, trade – and which trade at a profit. By contrast, APR can be obtained by an agricultural landlord, whether at 100% or at 50%: here the qualifying period of ownership is seven years. Nor is the view to a profit required for APR. BPR is given on a worldwide basis, whereas APR is limited to property in the EEA.  BPR is applied to market value, while APR is limited to ‘agricultural value’ (see 2.5.3(d)). The big advantage which farmers have over other businessmen is that APR can be given to the farmhouse, though this has been exciting recent adverse scrutiny from both HMRC and the Courts.
 
Woodlands can attract BPR, provided that they are managed in a business-like way (annual accounts, VAT registration etc), even if it is hard to show a profit on an annual basis.

The above is an adapted extract from Hutton on Estate Planning 3rd Edition.

Hutton on Estate Planning - 3rd Edition

Established in September 2008, Hutton on Estate Planning - 3rd Edition is the ideal way for private client practitioners to keep up-to-date with developments in a fast moving world.

The electronic text will be available mid-September 2010, with the printed book ready for despatch in mid-October. Updates are made to the electronic text at least monthly and subscribers are notified by email of the changes, which are carried in the text in a second colour.

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'I love the sub-title Practical Solutions to Today's Problems as this highlights the approach Matthew has adopted throughout the Book. If I were still involved in the provision of tax advice myself this is one Book I would want on my shelf. More than that I would also want to be able to access the e-Book version too.' Mark Lee, Chairman of the Tax Advice Network

Subscriptions run for 12 months from 1 October 2010, though subscriptions placed in September will secure access to the eBook as soon as it is available, anticipated to be Friday 17 September. The subscription price depends upon the number of subscribers each of which has their own password and includes a copy of the printed book. The cost of a 12-month subscription for up to 10 Users is just £199 plus VAT plus £5 p&p.
 
Have a look at http://www.hutton-estate-planning.co.uk/, including a sample chapter, and either order online or through mhutton@paston.co.uk

THE ESSENTIAL FULL DAY ESTATE PLANNING UPDATE 2010

Matthew Hutton is running, for the 9th successive year, his Estate Planning Conference in three venues over Autumn 2010.

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