BR Guide Second Edition

11 10 THE IHT LANDSCAPE THE IHT LANDSCAPE Recent Developments 1.3 Developments in the IHT landscape that impact BR and the most recent developments to take note of are discussed in the following sections. Office for Tax Simplification IHT Review Following Chancellor Philip Hammond’s request in January 2018, the Office for Tax Simplification (OTS) has carried out a review of the IHT regime. The OTS published the first of two IHT reports in November 2018. It was followed by a second report in July 2019. The government is not obliged to implement any of the recommendations made and is now considering both reports. In relation to BR and Agricultural Property Relief (APR), the first report is positive about the general complexity, “The evidence gathered so far suggests the reliefs are broadly working in a straightforward way.” No specific recommendations regarding BR were made. The second IHT report, is also broadly positive about BR, although it does point out that allowing AIM shares to qualify for BR appears to be outside the original policy objective of BR, “in particular where they are no longer held by the family or individuals originally owning the business.” Despite this anomaly, there’s no specific recommendation on this topic because the OTS recognises the government’s position that, not only is BR important in supporting family owned businesses, it is a significant contributor to “growth investment in AIM and other growth markets.” The recommendations include several which could open more activities and structures to BR, including treating companies running furnished holiday lets as trading to match their treatment for income tax and Capital Gains Tax (CGT) purposes. Currently they are treated as holding investments and simply don’t qualify for BR. This could have positive implications for multiple other land-based activities and their BR qualification. But it would likely be expensive to implement. Bringing consistency to tax treatments is also behind the recommendation to align the BR trading test with the tests for gift holdover relief and entrepreneurs’ relief. Currently, more than 50% of a company’s trading activity must be in BR-qualifying trades, with investment activities included among those that are non-qualifying. But for CGT relief by way of gift holdover relief or entrepreneurs’ relief, the eligibility test applied by HMRC involves an 80:20 split of trading vs. investment. As far as CGT is concerned, the capital gains uplift on death sees a person inherit assets at their market value on the date of death, rather than when the deceased acquired them, for CGT purposes. So, any gain made by the deceased is wiped out. The same does not apply to a lifetime gift given with the application of CGT holdover relief; while there is no immediate charge to CGT, the recipient is treated as acquiring the asset at the donor’s historic acquisition cost. As a result, when the asset is disposed of, any gains made by the donor are taken into account for CGT purposes. BR could also apply for IHT purposes. To remove the potential for business owners to retain their company until death, whether it’s best for the business or not, in order to qualify for both CGT and IHT mitigation, the OTS’ recommendation is that where BR applies, the recipient is treated as acquiring the assets at the historic base cost of the person who has died. In a choice between IHT and CGT mitigation, with the likely higher value of tax mitigation attributable to IHT at 40% of total asset value vs. 20% of asset growth (based on current rates for higher or additional rate taxpayers on a sale of assets other than residential property), IHT would be the probable winner. Overall, it’s clear that BR remains relevant and important and the OTS recommendations could largely be considered as technical tinkering. BR has been properly looked at as part of the Patient Capital Review and it was deemed to be operating broadly within the range and the mandate that they were expecting it to. The second report published from the Office of Tax Simplification noted the government's commitment to protecting the important role that BR plays in supporting family businesses and growth investment in AIM and other markets. The OTS heard evidence of its importance in meeting that objective. HENNY DOVLAND, TIME INVESTMENTS Value of business and agricultural property reliefs SOURCE: OTS IHT REVIEW 2 ND REPORT, JULY 2019 16,380 - number of estates expected to benefit from BR or APR over the five years from 2019/20 £5.85 billion - total cost to the Exchequer of BR and APR over the five years from 2019/20 of both reliefs (compared with £30.4 billion - total IHT yield expected over the net five years) £357,000 - average benefit for each eligible estate of both reliefs over the five years from 2019/20