If you think your estate might be worth more than the Inheritance Tax threshold (£325,000 for the 2011-12 tax year) when you die, there are some ‘reliefs’ you can use to reduce the Inheritance Tax (IHT) bill.
Kings Court Trust is currently dealing with the estate of Phillip Michael Norman*, which includes a well-established farming business as part of the estate. Barbara Ashby, Probate Consultant at Kings Court Trust, met with the deceased’s family to discuss the estate and how we could help reduce the IHT bill in the course of the administration process.
The deceased’s wife died three years ago, and everything passed directly to Mr Norman. Mr Norman owned a long standing Limited Farming Business in partnership with his sister – one share each. The estate includes the business premises - two properties with over 150 acres of land, worth in excess of £1 million. The farms have a small income from renting land out for cattle under grazing licences/lets, amounting to £15,000 per year.
In this instance, we are able to use business and agricultural relief in order to substantially reduce the IHT bill.
Business Relief allows you to pass on some of the business assets (that are part of a business that qualifies for Business Relief) in your estate free of Inheritance Tax. You can pass on these assets while you're still alive or as part of your Will. You can claim relief on property and buildings, or assets such as unlisted shares, tools and machinery used in the business, or unlisted shares in companies whose activities qualify for Business Relief. Depending on the type of ownership of the asset (personal/owned by the business), they'll qualify for relief of either 50 or 100 per cent of the relevant value for the purposes of Business Relief, which will be available to set against the value of the asset for assessment of IHT liability.
Agricultural Relief is applicable if you own agricultural property, land or buildings which are part of a working farm that qualifies for Agricultural Relief. As with Business Relief, you are able to pass on some of your property free of IHT in your Will or before you die. You can claim relief for agricultural property such as farmland. You can also claim relief for a farmhouse, cottage or buildings if the size of the buildings is proportionate to their level of farming activity for the purposes of Agricultural Relief. Depending on the type of property, it will normally qualify for relief of 100 per cent of the agricultural value of the property. However, property rented out before 1 September 1995 usually only qualifies for relief of 50 per cent of the agricultural value. Relief is not available for farm equipment but it may qualify for Business Relief as a business asset.
There are also other types of relief that are less common, but which may apply in certain circumstances:
Woodland Relief means that when you die, the beneficiaries of your woodland can ask that the value of the timber - but not the land - be excluded from your estate. However, when the timber is sold, the beneficiaries may have to pay IHT on the value of the sale unless it also qualifies for relief. If the woodland qualifies for Agricultural Relief, Woodland Relief may not be available and you should claim Agricultural Relief instead. Business Relief may be available on woodland that qualifies as a business asset.
Relief for National Heritage assets - Some assets may qualify for relief from IHT under certain very strict and exceptional conditions. These conditions include an agreement to maintain and preserve the assets. They must also be made available to the general public to view. Examples of assets that may qualify include buildings of outstanding historic or architectural interest and objects which have national scientific, historic or artistic interest.
*Names and certain details have been changed.
If you would like further advice following a bereavement or information about Kings Court Trust services, then please call our estate administration specialists on freephone 0800 014 7334.