Farmers could face steep hikes in Inheritance Tax if new HMRC proposals come into force, rural accountants warn.
Currently, landowners can put properties into trusts in order to hand them over to the next generation; often saving Capital Gains Tax and Inheritance Tax in the process, says head of rural services Andrew Vickery. But now HMRC is proposing to cap the tax-free value of trusts at £325,000, meaning any properties worth more than that may incur IHT charges.
“In recent years trusts have become a useful tool for many family farms looking to either protect assets or pass them down to the next generation,” says Mr Vickery. They have been particularly beneficial for farmers with let properties, which have often lost tax reliefs upon ceasing to be working business assets, he adds. “As farm worker numbers have declined, the number of farm cottages being let on the open market has increased. At the same time, the value of those properties has rocketed.”
With the value and location of cottages often integral to the farm business, many farmers have opted to put them into discretionary trusts, enabling them to be passed down to the next generation tax-free. “Not only do discretionary trusts provide IHT relief, they also defer the capital gains that might arise in the case of an outright gift from one generation to the next,” says Mr Vickery. “Given how much property values have risen over the past 20-30 years, that presents a significant CGT saving.”
In addition, discretionary trusts enable the older generation to control the assets (although not benefit from their rental income), thus protecting against divorce or financial difficulties.
However, in recent weeks, HMRC has announced plans to clamp down on the tax benefits of trusts. “Historically, one individual could set up multiple trusts, each of which could qualify for its own IHT exemption - currently £325,000 after every seven years,” says Mr Vickery. “But the proposal is that all trusts set up by an individual after 6 June 2014 would have to share just one of these exemptions for the rest of that person’s lifetime.”
This means that farmers with let assets worth more than £325,000 will not be able to pass them on tax free through trusts. “The detail is inevitably complex, but if these proposals are put into practice, farmers will have to find other ways to pass assets down the generations without incurring high IHT and CGT bills,” says Mr Vickery.
“The principal message is not to panic but consider as soon as possible whether your family farming business is likely to be exposed to IHT, and assess how to pass assets safely to future generations in a way that will allow them to continue farming.”
Trusts will still be an option for many farmers, but may not be the only solution in the future, he adds. “The process of passing assets over is likely to take longer as a result of the changes, if significant tax charges are to be avoided. There remain a good number of other options available and we would be pleased to speak to anyone who wants to understand their potential IHT liabilities better.”