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Planning: don’t let the tax tail wag the dog

Tax planning is only one element of a robust plan.

Partner at Lodders Solicitors, John Rouse, believes tax planning is only one element of a robust tax plan, and it’s important not to let the tax tail wag the dog. 

Effective estate planning and using specialist trusts, enables maximum use of inheritance and income tax allowances whilst reducing the overall tax burden.  

Mitigating Inheritance Tax (IHT) ranges from lifetime giving, to wills and post-death planning. 

IHT planning for farmers and farming businesses has traditionally been straightforward with IHT and capital gains tax (CGT) being rather benign, but increasingly, HMRC is scrutinising IHT planning and claims for tax relief on death, and adopting a more aggressive approach to APR and BPR claims. 

IHT Planning trap  

With increased development potential for land and buildings, a growing area of concern is the ‘IHT planning trap’ that is based on the average UK farmer being aged 59.  If they hold land with longer term development potential, by the time the land has been zoned and bought they could be in their seventies.   

Whilst held as land, IHT reliefs are available but as soon as the sale proceeds are received, the landowner receives a large sum of money just at the time they are most vulnerable to IHT; HMRC could not only pocket the CGT on the sale, but 40% of what is left in IHT. 

With timely planning, this type of tax hit can be avoided, but if you do not get IHT planning right, the tax liability can effectively be the death knell for the family farm or significantly reduce the potential inheritance. 

If you simply leave tax considerations until someone has died, or on the second death in the case of married couples, it is too late to mitigate the tax, but judicious planning can achieve significant tax savings. 

Diversification 

With falling farm incomes, diversification is a valuable consideration to maximise financial returns, but can lead to restrictions on APR and BPR. 

I recently acted for an elderly farmer with approximately 80 acres.  To generate further income he diversified to create a caravan site, holiday lets and campsite.  The farmer retained all the assets and, in failing health, was concerned that inheritance tax relief would not be granted as he had moved away from traditional farming.  We worked with the family to formalise a business, structure the ownership of assets, and make flexible tax planning wills. 

On the farmer’s death, 100% BPR was claimed, with the knowledge that if the claim was unsuccessful, assets could be passed to the widow to stop inheritance tax being paid but with the ability to consider alternative planning to mitigate the tax liability on the widow’s death.  Ultimately HMRC ruled tax relief was available, so the business could be passed to the next generation tax-free, giving the family peace of mind that the family business and its future was secured.   

The beauty of the planning was that if tax relief had been denied, assets could be passed to the widow and the business restructured to obtain tax relief before the widow died. 

More information 

John Rouse is a partner in the Agriculture Sector and Private Client teams of law firm Lodders and specialises in advising clients on a range of wills, tax and estate planning matters, including LPAs, personal tax, business structuring, trusts and blood line planning. He is a director of the Kenilworth & District Agricultural Society, past chairman and board member of Coventry & Warwickshire First and a Committee member of the Warwickshire Farmers Ball.  

Always seek professional tax planning advice. The opinions and views in this article are for information only and do not constitute legal advice. 

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John Rouse