What is the Nil Rate Band?

Nil Rate Band

The Nil Rate Band (NRB), also known as the Inheritance Tax (IHT) threshold, is the amount up to which an Estate has no IHT to pay.

The current allowance available on the Estate of an individual is £325,000; anything above this is taxed at 40%.

The NRB applies to property passing on death together with any taxable gifts made within the seven years before death.

Example

In 2017, Dora dies leaving an estate to her son and daughter worth £325,000.

Dora has never owned a residence, as she was a tenant farmer all her life and lived in rented accommodation. IHT is payable as follows:

£
Chargeable estate 325,000
Less: nil rate band (325,000)
Balance 0
Tax at 40% 0

This threshold is per individual and it is also possible to transfer the allowance between married couples and civil partners.

The NRB is fixed at £325,000 until 2021.

From 6 April 2017, a Residence Nil Rate Band (RNRB) has also been available in addition to the NRB. To find out more about the RNRB, check out our blog ‘How Does the Residence Nil Rate Band Affect Farmers?

At Green & Co we have developed an Inheritance Tax and Estate Planning review in order to advise clients and their family fully with regard to these issues. If you would like to speak to one of our team, please feel free to contact us.

Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.

Your Redundant Farm Building could be Restricting your Inheritance Tax Relief

Your Redundant Farm Building could be Restricting your Inheritance Tax Relief.jpg

Agricultural Property Relief (APR), if obtained, allows an individual to pass on agricultural property, either in their Will or during their lifetime, free of Inheritance Tax (IHT).

Business Property Relief (BPR) reduces the IHT payable on a wider class of qualifying business assets when they are left in a Will or passed on during lifetime.

In order to qualify for APR farm buildings must be occupied for the purposes of agriculture – derelict buildings will not qualify for the relief. Similarly, if the property has not been used wholly or mainly for business purposes in the two years prior to the transfer, BPR will not be secured.

It’s important for all Farmers to consider their exposure to IHT and if farm diversification is currently being pursued, i.e. alternative uses of agricultural land and buildings, then it’s wise to act sooner rather than later.

If you would like further advice on Inheritance Tax please contact Green & Co on 01633 871122.

Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.

Budget Brings Big Changes to Farming Businesses

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The recently announced National Living Wage of £7.20 per hour is expected to hit farming businesses hard. The launch of the new wage, which is replacing the National Minimum Wage, was announced in the Chancellor’s budget and represents a jump of 11% from the current £6.50 an hour. The amount is set to rise to £9 per hour by 2020 for employees aged over 24.

For many companies, a reduction in corporation tax will help to offset the rise, but this applies to fewer than 10% of farming businesses. Henry Robinson, president of CLA which represents many rural landowners, said “As a result of this budget, farmers and other rural businesses are presented with significant inflation in wage costs and the cut in corporation tax that is supposed to pay for it will not benefit them… There are hundreds of thousands of family businesses in rural England and Wales that are unincorporated and therefore are taxed on higher tax rates.”

However, the new Inheritance Tax Relief rules look to benefit many farming families, as the Chancellor announced the creation of a £175,000 family home allowance for each individual. While many farming properties qualify for agricultural property relief from inheritance tax, claims are very closely scrutinised by HMRC and the new allowance will help some farming families. The new allowance is transferable between spouses and there will be an ability to also take advantage of the new allowance even if you downsize.

Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.

Image courtesy of Pakorn at FreeDigitalPhotos.net

Barn Conversions And Tax Planning

 

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There has been much publicity about the current Housing Crisis, and the Government has recognised the need to encourage new housing development. In England ‘permitted development rights’ have been extended to allow more development of farm buildings for residential use. This is a positive move for house buyers, the rural economy and land owners.

However, any property development has substantial tax implications that must be considered at an early stage. These include:

  • VAT – this can range from 20% to 5% to Nil
  • Income tax – this will depend on who owns the property
  • Capital Gains Tax (CGT) – a liability of up to 28% can arise if the property ownership is not planned correctly.
  • Inheritance Tax (IHT) – this can be 40% if the property ownership is not planned correctly.

The type of situation we often see is a family farm owned by a father and farmed in partnership with his son. The farm includes a barn which is going to be converted and occupied by the son. Changing the ownership of the barn to the son before the development could:

  • Reduce the VAT cost from 5% to Nil
  • Reduce any future CGT charge from 28% to Nil
  • Avoid the house forming any part of father’s estate which could reduce the IHT charge from 40% to Nil.

In almost all situations time spent on planning before the development starts will substantially reduce the cost of the development.

Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.

 

Who Owns The Farm?

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Everyone with an ownership interest in your business must understand who actually owns the property. Misunderstandings can lead to expensive litigation especially when the ‘Three Ds’ arise – Death, Development and Dispute. Lack of planning can also result in unexpectedly high tax liabilities.

A simple example would be a farming partnership of father and son. The farm includes some barns which are about to be sold for residential development with a premium value of £500,000. Unfortunately, father dies unexpectedly and so the Inheritance Tax position has to be considered. If the farm is owned by father then it is likely that 50% of the value of the development land will be taxable at up to 40%. This could cost £100,000.

If the farm is owned by the partnership then it is likely that none of the value of the development will be taxable – saving £100,000.

This is clearly a simplified example but it demonstrates the importance of being clear on who owns the property and engaging your accountant and solicitor in the planning process.

Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.

Budget 2014: Important Changes

There are a number of items in the recent Budget that are important for farming businesses and landowners. However, we have identified these 2 points as particularly significant in some cases:

  • There will be an increase in the maximum amount of Annual Investment Allowance to £500,000 from April 2014 to 31 December 2015, after which it will return to £25,000. This means that you will get 100% tax relief on the first £500,000 of expenditure on Plant and Machinery. This could be very significant if you are thinking of building new Silage Clamps or Slurry Store facilities.
  • If your home is owned by a limited company and is worth more than £500,000 there is a risk you may have to pay extra taxes. In many cases this will not apply if you are running a farm business but it is important to check.

For more general information on the Budget please follow this link to our Budget Report: Green & Co Budget Summary 2014

If you are interested in the tax allowances for 2014/15, please refer to our Tax Tables: Green & Co 2014/15 Tax Tables

Please contact us if you need more information on these changes, or any other matter.

Renewable Energy: Beware The IHT Implications!

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For landowners looking to secure income through renewable energy development, a key decision is whether to go it alone and install and operate the project themselves, or simply to lease the land to a developer. But the two options have very different tax consequences from the perspective of capital taxes. The major concern for most landowners is inheritance tax.

The two main reliefs are agricultural property relief (APR) and business property relief (BPR) and can be either 50% or 100% relief.

APR only gives relief to the agricultural value of the land and so any value accruing due to the renewable energy project will not qualify.

BPR may be available depending on whether the project is considered by HM Revenue and Customs to be an investment as opposed to a trade. Essentially, an in-hand project is likely to be considered a trade and BPR may well be due once the required minimum two year period has been met.

Let land is, however, in most circumstances regarded as an investment and as such would not automatically qualify for BPR.

Clearly, it is important when deciding to secure an income from renewable energy that the correct structure is put in place in order to obtain either full APR or BPR. Professional advice should be sought before entering into any contract. Green & Co would be happy to help in such circumstances. Contact us on 01633 871122.

Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.

Giving at Christmas – Inheritance Tax Allowances & Exemptions

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Christmas is a time for giving…and most people are very happy if you give them money! However, it is worth remembering your allowances and exemptions for Inheritance Tax.

If your estate is worth more than the Inheritance Tax threshold – £325,000 for the 2013-14 tax year – there are some important Inheritance Tax exemptions that allow you to make gifts to others and not have to pay tax on them when you die:

Annual exemption 

You can give away gifts worth up to £3,000 in total in each tax year and these gifts will be exempt from Inheritance Tax when you die. You can carry forward any unused part of the £3,000 exemption to the following year, but if you don’t use it in that year, the carried-over exemption expires.

In addition to the annual exemption there are other exemptions for certain types of gifts. These are explained below.

Small gifts 

You can make small gifts up to the value of £250 to as many individuals as you like in any one tax year. However, you can’t give more than £250 and claim that the first £250 is a small gift. If you give an amount greater than £250 the exemption is lost altogether.

You also can’t use your small gifts allowance together with any other exemption when giving to the same person.

Regular gifts or payments that are part of your normal expenditure 

Any regular gifts you make out of your after-tax income, not including your capital, are exempt from Inheritance Tax. These gifts will only qualify if you have enough income left after making them to maintain your normal lifestyle.

These include:

  • monthly or other regular payments to someone
  • regular gifts for Christmas and birthdays, or wedding/civil partnership anniversaries
  • regular premiums on a life insurance policy – for you or someone else

You can also make exempt maintenance payments to:

  • your husband, wife or civil partner
  • your ex-spouse or former civil partner
  • relatives who are dependent on you because of old age or infirmity
  • your children, including adopted children and step-children, who are under 18 or in full-time education

Exempt gifts

Some gifts made during your lifetime are exempt from Inheritance Tax because of the type of gift or the reason for making it:

Wedding gifts/civil partnership ceremony gifts

Wedding or civil partnership ceremony gifts are exempt from Inheritance Tax, subject to certain limits:

  • parents can each give cash or gifts worth £5,000
  • grandparents and great grandparents can each give cash or gifts worth £2,500
  • anyone else can give cash or gifts worth £1,000
  • You have to make the gift – or promise to make it – on, or shortly before, the date of the wedding or civil partnership ceremony. If the ceremony is called off and you still make the gift, or if you make the gift after the ceremony without having promised it first, this exemption won’t apply.

Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.

Article written by guest blogger, Andrew Tucker, Financial Planning Solutions Ltd

“Does Your Farmhouse Pass The Elephant Test?”

Elephant

Probably a question that you wouldn’t normally associate with farmhouses, or indeed, farming, but it is relevant for Inheritance Tax (IHT). Most farmers are not concerned about IHT, believing that their farm will qualify for 100% Agricultural Property Relief (APR) and in many cases the farm is the most valuable asset in their estate.

Unfortunately over the last few years it has become increasingly difficult to get 100% APR on farmhouses. Whilst the law has not changed, it is being interpreted differently. In many cases 30% of the value of the farmhouse does not qualify for APR.

There have been many legal cases testing eligibility for APR including one which indicated that farmhouses should pass the ‘Elephant’ test. The presiding judge believed that you would know an elephant if you saw one and similarly you would recognise a genuine farmhouse.

It has been suggested, by a well-known land agent, that you can tell a lot about a farmhouse if there is an orphan lamb in the Aga. It is a working farmhouse if the lamb is by the oven; it probably is not a working farmhouse if the lamb is in the oven. Fortunately the courts have not yet suggested a ‘Lamb’ test!

The important point to note, which many farmhouse owners are not aware of, is that many farmhouses no longer fully qualify for APR. It is therefore a good time to review your estate planning as often there are ways to significantly reduce the IHT that your estate will suffer.

At Green & Co we provide an Inheritance Tax and Care Home Fee Review Service to help you decide how to organise your estate in the best way possible.