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Size of relief for heirs

Inheritance tax is often known as a voluntary tax because there are so many ways of not paying it.

However, many estates are still subject to IHT – mainly because we are not prepared to give away the bulk of our assets during our lifetime.

To minimise the amount of IHT paid, we also need to make best use of all the reliefs that are available. None of us is so rich as to make paying tax a pleasure – even if we are dead at the time.

Business property relief

This relief is available both for lifetime gifts and legacies on death but the extent of the relief depends on the asset (see table below).

The asset must be either a qualifying business, shares in a qualifying business or an asset used in a qualifying business. A qualifying business is a trade, profession or vocation carried on for a profit – it does not include business carried on as a hobby.

A qualifying business is generally not an investment company or a business dealing mainly with securities, land and buildings or in the making or holding of investments. The transferor must have owned the property for at least two years before the transfer.

If a lifetime gift of an asset becomes chargeable on death, the transferee must still own the asset at the time of the death and it must continue to qualify for relief.

You can replace the asset with another qualifying asset and the joint period of ownership will count towards this condition, provided one or other property was owned for two out of the last five years.

If the asset was inherited from a spouse, the joint period of ownership goes towards the two-year qualifying period.

Then there are buy and sell agreements where individuals have to sell and others have to buy these assets. If a buy and sell agreement between business associates is in place for an interest in a business or the shares of a business, generally speaking, the deceased&#39s personal representatives have to sell the assets and the surviving business partners or shareholders have to buy them.

Business property relief will generally not be available when there is a buy and sell agreement in place. This is because the Inland Revenue does not view the legacy as business assets but cash, as the legacy will be converted into cash immediately.

An alternative to a buy and sell agreement is a cross option or double option agreement. These are similar to buy and sell agreements but business property relief is maintained because there is an option to sell and buy rather than a compulsion. It is therefore possible that the sale will not go ahead.

Assets comprising a Lloyd&#39s name&#39s deposit and special reserve are also eligible for business property relief.

Agricultural property relief

The relief is based on the agricultural value of the property (see table above). This may be different from the actual open value of the land. For example, the amount someone would pay for the land with building permission might be considerably more than the agricultural value.

Any debts on the property will be deducted before agricultural property relief will be applied.

Where an estate includes woodland, an election can be made to have the value of the timber (but not the land on which it grows) excluded from the estate at that time.

The election must be made within two years of death and the deceased must have owned the woodland for at least five years before death.

The timber will come into charge when it is sold or gifted. IHT will be payable on the net sale proceeds, that is, the sale proceeds less the costs of replanting, which are not deductible for income tax.

The amount chargeable is treated as though it was the top slice of the deceased&#39s estate and the rate of tax payable will generally be that applicable at that time. If rates have since come down, it will be the new rates that apply.

The person who will be liable for this tax will be the person who is entitled to the sale proceeds. The tax is due six months after the disposal. Business property relief may be available if the woodland forms part of a business.

Taper relief

This relief applies where a lifetime gift is made and the donor then dies within seven years. The lifetime gift therefore becomes chargeable.

The tax payable on the gift is reduced by a percentage depending on the time which has elapsed between the gift and death (see table below left).

Many people get confused with this relief. They think the relief reduces the gift. It does not. It reduces the tax. If there is no tax payable on the gift – where the gift (together will other chargeable gifts) is, for example, within the nil-rate band – no relief will be given.

LEVELS OF BUSINESS PROPERTY RELIEF

50% business property relief 100% business property relief

l Shares giving control of a quoted l An unincorporated businesscompany. Control is defined as such as the interest in a partnership

having control of the majority of or a 100 per cent interest in the

voting powers on all questions case of a sole trader.

affecting the company.

l Unquoted shares and securities

l Land, buildings, machinery or in companies not listed on a

plant in a partnership or in a company recognised stock exchange but

controlled by the transferor or in including those traded on the

a settlement in which the transferor Unlisted Securities Market or thehad the interest in possession. Alternative Investment Market.

LEVELS OF AGRICULTURAL PROPERTY RELIEF

100% agricultural property relief 50% agricultural property relief

l Transferor has vacant possession l Most other cases.or right to obtain it within 2 years.

LEVELS OF TAPER RELIEF

Years between Reduction in

gift and death death tax tax payable

0-3 0%

3-4 20%

4-5 40%

5-6 60%

6-7 80%

IHT CHECKLIST FOR IFAS

l When putting life cover in place to cover IHT, by all means take business property and agricultural property relief into account. However, consider what will happen if the qualifying business is sold. The IHT liability will dramatically increase – possibly at a time when increased life cover will be much more expensive or even impossible to get if the individual&#39s health has failed. That may be the reason he has sold his interest in the business.

It might be best advice to put the whole cover in place from the start, when cheaper rates are available. The only downside is that the life cover will amount to more than the IHT payable although that means more money is available for the family.

l Do not assume that business property relief will always apply to business assets. Business property relief may not apply to cash held in a business, for example, the capital account in an unincorporated business.

l Remember taper relief only applies to the tax payable on a gift. If a gift remains in the estate for seven years, this increases the total amount of tax payable by the estate, as less of the nil-rate band will be available. The net effect is that an extra amount sits at the top of the estate for seven years. In many cases, the cover required is seven-year term insurance for 40 per cent of the gift&#39s value. Put the cover in a flexible trust for the beneficiaries.

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