One of the Complexities of Rural Inheritance Tax

Acronyms are already rife in the world of rural law and tax – for example AHA and FB tenancies, BPS, IHT, APR, BPR, NRB.

Now, to muddy the waters further, there’s another to add to the mix. From April 2017, the RNRB, or Residence Nil Rate Band, will be introduced. In theory, this is good news for the rural landowner. But will it actually make much difference? writes Anne Elliott, CEO Darlington law firm Latimer Hinks.

Anne Elliott, CEO Latimer Hinks

Anne Elliott, CEO Latimer Hinks

First, let’s look at how things stand at the moment. Currently, assuming no gifts within 7 years of death, Inheritance Tax (IHT) is not chargeable on the first £325,000 of value. The figure is £650,000 for spouses. Additionally, Agricultural Property Relief (APR) can be applied to agricultural property bequeathed and gifted, and, in very, general terms, is calculated at either 50% for “old style” tenanted land, or 100% for land farmed personally or under a Farm Business Tenancy. The additional area of complication is in relation to residential property, which is not occupied for agricultural purposes or is deemed not to be “character appropriate” to the farm, or performs merely an ancillary function.

In cases where APR cannot be applied to farmhouses, the new RNRB can from April 2017 be applied up to a total of £100,000 in 17/18, rising to £175,000 in 2020/2021. The starting figure will be £200,000 for married couples rising to £350,000. Taking APR and the existing IHT threshold into account, RNRB may very well help take some farmers out of the IHT bracket altogether. But the real problem, particularly given land values today, is that RNRB is tapered out by 50p in every £1 by which the value of deceased person’s estate exceeds a £2 million threshold. £2 million sounds like a lot of money, but to a landowner with a relatively small acreage, a farmhouse, and farm buildings the RNRB will probably not be available.

The new RNRB rate might encourage lifetime giving which can reduce the value of the estate below the £2 million figure so as to save IHT. Similarly, a farmer might retire and move out of the farmhouse into a smaller property on the farm with the RNRB then applied to the smaller property (depending on the total value of his assets).

There are further restrictions on the availability of the RNRB – eg. the property must be “inherited” by an immediate family member. The RNRB represents an interesting development for the future which may warrant consideration. What is abundantly clear is that the changes highlight yet again the need for greater focus on will reviews and succession planning to secure farms and landholdings for future generations of farmers – and to minimise the IHT bill.

Latimer Hinks

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