Inheritance Tax: Will the new residential nil rate band be available to farmers?

On 6 April 2017 the new inheritance tax (IHT) residential nil rate band (‘RNRB’) came into force. This is an IHT relief that operates (where it can be claimed) to reduce the taxable value of a deceased’s main residence, ultimately allowing up to £1m value property to pass to the next generation. Although very welcome, we consider whether this facility will be available to farming families when passing on the family farm.

The RNRB’s introduction is to be phased, such that the tax free allowance capable of being offset against a deceased’s main residence will be up to £100,000 in the tax year 2017/2018, £125,000 in 2018/2019, £150,000 in 2019/2020 and £175,000 in 2020/2021. Unused allowances can be transferred between spouses with the result that the relief can potentially be doubled for married couples.

Many farmers believe that they do not need to worry about IHT on their main residence as it will attract agricultural property relief (APR). However, the reality is that many farmhouses do not qualify for APR (perhaps because the agricultural land is let) and even for farmhouses that do attract APR, it is almost always the case that the property has some non-agricultural value that remains taxable on death. Famers therefore need to be aware of how the new RNRB operates and where possible, should plan to ensure that their estate takes advantage of the new relief.

Conditions: Qualifying residence

In order to claim successfully, the new RNRB executors need to be able to demonstrate that a number of conditions have been fulfilled. First, the deceased must have had a ‘residence’ at death against which the RNRB can be applied, or at least, have had a residence at some point after the new rules were announced on 8 July 2015. A residence is a property that has been occupied as the deceased’s principal home (investment properties do not count). This is the easiest condition to fulfil, particularly given that there are specific ‘downsizing’ provisions that protect elderly individuals who downsize their principal residence and move into less valuable accommodation or care homes. In these circumstances the sale proceeds from the former main residence effectively attract the benefit of the RNRB instead.

Inheritance by direct descendant

The second requirement is that the relevant main residence must be inherited by a ‘direct descendant’. For these purposes ‘direct descendants’ are defined as children, grandchildren or other lineal descendants, including step-children and adopted children. The definition also extends to the respective spouses and civil partners of lineal descendants and widows, widowers and surviving civil partners who have not remarried. Clearly, farmers who do not have children and want their farmhouse to pass to siblings, nephews or nieces (or other family members) will be prejudiced by this condition. It is also worth noting that it is more important that ever to make sure that succession planning documents (such as Wills) are up to date and that the main residence is passing to appropriate beneficiaries. The relief will still generally be available if direct descendants inherit a main residence through a trust structure created by the deceased’s Will, but specialist advice should be sought.

Overall value limit

The final requirement is that the overall value of the deceased’s net estate must not exceed the tapering threshold of £2m. Where an estate is valued in excess of £2m, the available RNRB will be reduced by £1 for every £2 that the estate is over the £2m threshold. The withdrawal of the RNRB in this way means that for deaths during the first year of the relief (when the RNRB will be £100,000) if an estate is worth £2.2m (or £2.4m if an unused RNRB has been transferred to a surviving spouse) the RNRB will have tapered to nil.

These provisions are particularly problematic for farmers because the legislation makes it clear that when calculating the net value of an estate it is not permissible to take into account any other ‘reliefs or exemptions’ that apply under IHT legislation. Accordingly, assets and property that qualify for APR or business property relief are still taken into account when considering whether the £2 million threshold has been exceeded. Although representations have been made to the Government in an attempt to reverse this aspect of the legislation all lobbying has been without success. The unfortunate result is that a large proportion of farmers will be unable to claim the RNRB due to high agricultural land prices that push the overall value of their assets above the relief’s taper threshold.

Summary

The RNRB is a useful relief that has the potential to save IHT on death. However, the restrictive conditions attached to the relief mean that it is not going to be universally available. It is worth all farm owners considering whether they are likely to qualify for the RNRB or whether any simple steps could be taken to help them qualify. Ultimately, whilst the new relief is helpful it cannot be over relied on and farm owners should still be making sure that they operate through tax efficient structures with a sensible succession strategy.

For more information please contact James Frampton, Partner in the Private Wealth team at james.frampton@michelmores.com