Meg Saksida considers various ways property can be protected from IHT in the death estate.
The main residence, although exempt for capital gains tax, is not exempt for inheritance tax (IHT) purposes. Usually, it will be taxed at 40% of the probate value at the date of death.
Residence nil rate band
However, the Conservative party election manifesto in 2015 promised to “take the family home out…[of IHT] with a new transferrable main residence allowance of £175,000 per person”. This was indeed introduced, and the ‘residence nil rate band’ (commonly known as the ‘RNRB’) was born. The RNRB is able to be claimed for deaths from 6 April 2017. Although the band was gradually phased in over four years starting with £100,000, the current and future tax years will have the full £175,000 available.
The RNRB operates not to reduce the chargeable value of the transfer of the residence, but to add another nil rate band. However, this is only available on certain estates. These are where the testator or the law (under the rules of intestacy) has left a ‘qualifying residential interest’ to the children of the deceased; defined as being ‘closely inherited’.
A ‘qualifying residential interest’ is a dwelling house (having the same definition as the capital gains tax legislation) that had at some point been the deceased main residence. If the property was only ever owned as a buy-to-let for example, using the RNRB would not be possible.
‘Closely inherited’ means that the property is bequeathed or passed on to lineal descendants. These include not only natural and adopted children, but also stepchildren and foster children, and issue henceforth; so grand and great grandchildren of the deceased too. Sadly, an estate from a childless individual cannot use the RNRB.
Although the RNRB is limited to one residential property per estate, there is no minimum ownership period and the RNRB of a previous spouse can also be transferred to the later death. For RNRB purposes this is called the ‘brought forward’ allowance, and converts the percentage not used on the first death to a percentage of the RNRB at the value it is on the later death.
However, the RNRB is not available if the value of the estate is more than £2 million. For every £2 over the estate value of £2 million, the RNRB will be reduced by £1; meaning that estates over £2.35 million will not be able to claim any RNRB.
Farmhouse and farm buildings
Agricultural property relief (APR) is extremely important for any farming connected land and buildings that may be in the estate of the deceased, and is given automatically with no need to claim as long as the conditions are satisfied.
The sort of property that would be included here would be land such as pastures, fields and woodlands; farm buildings such as sheds, milking parlours, chicken sheds; farmhouses and farm cottages. ‘Agriculture’ has no formal meaning but includes horticulture and the rearing of livestock.
There are three essential conditions required to claim APR; the first two for land and buildings and the last one only for buildings. The first is the ownership condition. If the deceased was the farmer, they needed to have owned the land for two years. If the deceased let the farm to someone else to farm, the deceased will need to have owned the farm for seven years at the date of his death to be eligible. The second condition is the occupation condition. In all cases the land or buildings must also have been ‘occupied for the purpose of agriculture’. Applied to farm buildings this means that they are being used on the farm for farming purposes. Applied to farm cottages, the occupation must be either a farm worker, a retired farm worker or their widow(er). Applied to the farmhouse, the occupation must be such that the house is the hub of the farm and all the decisions and plans that affect the farm are made there.
APR is only given on the agricultural value of the land or buildings, which is the value on the assumption that the property is never used for anything other than agricultural purposes for perpetuity. No ‘hope value’ or ‘development value’ is available through APR. APR is usually given at 100% but there are some old tenancies signed at the time of the Agricultural Holdings Act (pre 1 September 1995) that mean the rate is 50%.
Heritage properties
If the land has outstanding scenic, historical or scientific interest, or if the building is one that should be preserved due to its historical or architectural interest, it could be eligible to a ‘conditional exemption’ from IHT. A conditional exemption is just as it sounds; the exemption is on the basis that certain conditions are abided by and if these conditions are not met, IHT will become payable.
The conditions placed on the estate in order to claim are that firstly the asset is heritage property at the date of the death. This decision is made by HMRC on behalf of the Treasury. The second condition is that the PRs will need to make a claim for the exemption within two years of the death. What is really crucial though is the conditions that are placed on the beneficiary. They are the ones who must make ‘undertakings’ to HMRC to treat the property in a certain way. They must:
- Allow reasonable public access;
- Maintain and preserve the property; and
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Publicise when the property can be viewed by the public.
On the making of these undertakings the property is free from IHT until such point as the beneficiary either fails to observe the undertakings, dies without someone else making the undertakings or sells the property. In these cases, an IHT recapture charge occurs.
Commercial properties
Commercial properties may be in the estate in one of three ways; held directly by the deceased, held inside a sole trader or partnership business, or held inside a company in which the deceased had shares.
In the case of a commercial property held directly, there will be no relief available if it is simply held for investment purposes. However, if the property is being used in a company for which the deceased had a controlling interest or was a partner in, business property relief (BPR) of 50% will be available. If the land or building is being used in the deceased own sole trader or partnership business, BPR will be available against the value of the business at 100%. If the property is held inside a company, it will depend whether the company is ‘mostly investing’, and whether it is quoted or unquoted. If it is mostly an investment company, no BPR will be available.
However, if it is a trading company and unquoted 100% of the value of the shares will be covered by BPR. If the company is quoted on the other hand, the deceased will have had to control the company and if they do, they will obtain 50% BPR on those shares.
Practical tip
If IHT reliefs and exemptions are desired to be applied to property in the death estate, strict planning steps must be taken to ensure all the conditions and requirements for the various reliefs and exemptions are satisfied well before the death of the individual.
