Inheritance Tax on lifetime transfers and transfers on death - Business and agricultural property reliefs

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Overview

Inheritance Tax (IHT) is a key consideration in estate planning and wealth transfer, affecting both legal professionals and their clients. Business Property Relief (BPR) and Agricultural Property Relief (APR) offer valuable methods to mitigate IHT on lifetime and post-death transfers. This analysis examines these reliefs, their practical application, and their significance for the SQE1 FLK2 exam.

Business Property Relief (BPR)

Qualifying Criteria and Asset Types

BPR can offer up to 100% relief on eligible business assets:

  1. Unquoted shares in trading companies (100% relief)
  2. Quoted shares that control the company (50% relief)
  3. Assets utilized in a business operated by a partnership or sole trader (50% relief)
  4. Land, buildings, or machinery possessed by the transferor but used in a business they don't control (50% relief)

The business must be owned for a minimum of two years and be primarily engaged in trading rather than investment.

Trading vs. Investment Activities

The "wholly or mainly" test assesses if at least 50% of business activities are trading-related by examining:

  • Asset base
  • Income sources
  • Time allocation of employees and directors
  • Business intention and future plans

Example: DevCo Ltd, a property development company, needs to demonstrate its property development operations constitute over 50% of its activities for BPR eligibility.

BPR and Corporate Structures

  1. Holding Companies: Eligible if subsidiaries primarily engage in trading.
  2. Joint Ventures: Applicable if the business qualifies as trading.

Example: TechHold plc's BPR qualification depends on the roles and activities of its subsidiaries, TechTrade Ltd (trading) and PropInvest Ltd (investment).

Agricultural Property Relief (APR)

Eligibility and Scope

APR offers either 100% or 50% relief on the agricultural value of eligible properties:

  • 100% relief: Owner-occupied or let on short-term tenancies
  • 50% relief: Let on long-term tenancies

Key criteria include:

  1. Property must be situated in specific locations such as the UK or EEA.
  2. Used for agricultural purposes.
  3. Owned for 2 years (if occupied by the owner) or 7 years (if let).

Defining Agricultural Property and Use

Eligible properties include:

  • Land for growing crops or raising animals
  • Farm buildings, cottages, and farmhouses (subject to suitability tests)
  • Woodlands and facilities for intensive livestock or fish farming

Example: Greenacre Farm's components must fulfill specific criteria, such as the farmhouse's function relative to farm operations, to qualify for APR.

Interaction between APR and BPR

When a property qualifies for both:

  1. Apply APR first to the agricultural value.
  2. Use BPR for any remaining value.

Example: Hillside Estate's £3 million value includes £2 million for APR and £1 million potentially for BPR.

Lifetime Transfers and IHT Planning

Potentially Exempt Transfers (PETs) with BPR/APR

Combining PETs with BPR or APR may offer:

  1. Immediate Relief: Direct IHT relief at the time of transfer.
  2. Double Relief: Surviving seven years results in both relief and PET exemption.

Example: Clara’s shares in TechInnovate Ltd given to her daughter benefit from immediate BPR and potential exemption later.

Chargeable Lifetime Transfers (CLTs) and Trusts

BPR and APR influence:

  1. Entry Charges: Lowering IHT at trust creation.
  2. Periodic Charges: Affecting ten-year IHT evaluations.
  3. Exit Charges: Influencing IHT when trust assets are distributed.

Case Study: David's discretionary trust with his agricultural estate benefits from APR at inception, affecting future periodic charges.

Reservation of Benefit and Pre-Owned Asset Tax

Considerations include:

  1. Reservation of Benefit: Continuing to benefit from a gifted property can reverse IHT advantages.
  2. Pre-Owned Asset Tax (POAT): Applies when an individual benefits from assets they no longer own.

Example: Farmer John risks falling into reservation of benefit rules by gifting his farm while maintaining use and management.

Transfers on Death and Estate Planning

Deathbed Planning and the Two-Year Rule

Meeting the two-year ownership requirement for BPR and APR often complicates deathbed planning:

  1. Replacing non-qualifying assets with potential BPR assets near death might not ensure relief.
  2. Transferring business property within two years of death requires ensuring the recipient's eligibility for relief.

Will Drafting and Post-Death Variations

Careful will preparation and post-death changes can optimize BPR and APR:

  1. Flexible Will Trusts: This allows trustees flexibility in allocating assets to maximize reliefs.
  2. Deed of Variation: Adjusts inheritances to optimize relief use within two years after death.

Example: Sarah's will divides her business among her children. A variation directs shares to her business-active son, keeping BPR eligibility intact.

Interaction with Other IHT Reliefs and Exemptions

Consider the combination of BPR/APR with other reliefs:

  1. Spouse Exemption: Transferring business/agricultural assets to a spouse can preserve BPR/APR benefits.
  2. Charity Exemption: Used strategically alongside BPR/APR to reduce overall IHT.

Case Study: Thomas leaves his farm and investments to his wife. This keeps APR for future use while applying the spouse exemption to investment assets.

Recent Developments and Future Outlook

Legislative Changes and HMRC Scrutiny

Recent trends include:

  1. Increased HMRC scrutiny of BPR claims, especially for mixed business types.
  2. Proposals to limit APR on leased agricultural land.

Case Law Impacts

Significant cases include:

  1. Clarification of "trading" for BPR (e.g., Vigne v HMRC [2018] UKUT 357).
  2. Application of APR to farmhouses (e.g., Charnley & Ors v HMRC [2019] UKFTT 650).

Brexit Implications

Potential post-Brexit changes:

  1. Restricting APR for EEA properties.
  2. Expanding BPR to cover more EU businesses.

Conclusion

A thorough understanding of Business Property Relief and Agricultural Property Relief is essential for successful Inheritance Tax planning and the SQE1 FLK2 exam. Key points include:

  1. Meeting trading activity requirements for BPR.
  2. Ensuring agricultural property fulfills APR criteria.
  3. Strategic application of lifetime transfers with these reliefs.
  4. Addressing the complexities of BPR and APR in trust setups.
  5. Thoughtful estate planning to maximize relief at death.
  6. Remaining informed on legislative and case law changes.

By understanding these elements, future solicitors will be equipped to handle IHT planning and offer expert guidance in their careers.