First commissioned in January 2018, the Office of Tax Simplification (“OTS”) has now published its second report on its review of Inheritance Tax. The purpose of the review was to investigate whether Inheritance Tax could be simplified and to review the current administrative process. The first report was published before Christmas last year and focused on the concerns raised by those who responded to the review. The now published second report focuses on key technical issues.
I hesitate to explore in full the 107 page report which, amongst other matters, touches upon gifts during lifetime and to charity, the interaction between Inheritance Tax and Capital Gains Tax, the Residence Nil Rate Band, the taxation of Trusts together with Business Property Relief (“BPR”) and Agricultural Property Relief (“APR”). I do however, think it is helpful to highlight a few of the more positive recommendations made by the OTS particularly in relation to BPR and APR which are such important reliefs to landowners and farmers.
By way of recap, APR is available to reduce the Inheritance Tax due on agricultural assets in certain circumstances by up to 100%. BPR is also available to reduce the potential Inheritance Tax on business assets by up to 100%. The OTS report recognises the important role both reliefs play in ensuring businesses can pass from generation to generation without being sold to pay tax.
In respect of APR, the report recognises issues which have arisen in claiming the relief in respect of a farmhouse. In order to claim APR, the farmhouse must be occupied for agricultural purposes. Problems with claiming APR can therefore arise where a farmer moves out of the farmhouse to go into residential care or to receive medical treatment. At present, such unfortunate circumstances can result in the loss of the tax relief. The OTS has recommended that the Government review how APR should be applied in such circumstances.
In terms of BPR, I have mentioned in previous articles that this is not usually available on business assets which are wholly or mainly holding investments (i.e businesses which involve the letting of property). This is because BPR is only available on businesses involved in trade. This has caused problems to those with holiday lets which have generally been classed as holding investments. The OTS has suggested this position is reviewed so that furnished holiday lets which meet certain conditions are treat as trading (and therefore eligible for BPR) bringing Inheritance Tax in line with Income Tax and Capital Gains Tax.
There are of course many recommendations within the OTS report and it is not clear which (if any) will become Government policy. The outcome of the report now rests with the Chancellor, Philip Hammond who has indicated it will be considered by the Government and a response will be issued in due course.
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