This article appeared in the Yorkshire Post on Saturday 19th August 2006.

Beware Costly Ambushes from Tax Inspector

Nigel Shaw Director of Trusts and Estate Planning

Is your property exempt from inheritance tax? It depends what sort it is, says Nigel Shaw.

Caravan Parks
For some reason these are of a special interest to HM Revenue & Customs (HMRC) and over the last few years there has been numerous Special Commissioners cases regarding the desire of the authorities to charge IHT on the site owners. The rules are particularly complicated where there is a mixture of services provided on these sites including sales of caravans, social and other members facilities as well as storage of caravans but generally HMRC will seek to charge IHT on any value held in these sites in full and ordinarily you will not be eligible for exemption under the Business Property Relief (BPR) provisions. However, where you can demonstrate that a majority of profits and income derives from non-rental sources there may be an opportunity to claim 100% Business Property Relief which should mean that your exposure to IHT is severally curtailed.

Farmhouses
These types of properties are also “under attack” from HMRC who are seeking to curtail the availability of IHT relief under the Agricultural Property Relief (APR) provisions by seeking to establish the precise nature of the farmhouse in question and establishing whether it is used for “agricultural purposes”. In recent years there has been an increase in claims for this special relief on properties which could be said to offer very limited “agricultural use” and in fact resemble instead desirable residences with a few acres of agricultural land or paddock attached but very little farming activities taking place.

HMRC is now getting very protective about what constitutes a “farmhouse” and precise planning in this area is needed if any IHT surprises are to be avoided.

Commercial and office units
Many clients have sought over the last few years to seek alternative investments to the stockmarket and have invested directly in commercial units both for industrial and office rental purposes.

Where these properties are let directly to third parties it is unlikely that there will be any eligibility for BPR, which would exempt them ordinarily from IHT. Therefore, steps need to be taken to shelter the underlying value in such properties from IHT by the use of debt arrangements and/or shared ownership with other family members (and possibly family trusts). However, the best ownership structure for warehouses and office units continues to be those which are held directly by a family trading company or in some circumstances directly by the controlling shareholder of such company. In these circumstances eligibility for BPR will be available which continues to offer exemption from future IHT liabilities, provided that the property is actually used for the purposes of the company’s trade as any surplus property, which is let to a third party, may have IHT consequences.

Farm Cottages
Here again HMRC will be looking to establish the “agricultural use” of any properties held in a client’s estate and in common with many landowners it is likely that surplus farm cottages will now be let out for “non-agricultural” purposes. This will have significant IHT consequences and once again the ownership of such a property needs to be considered much wider in terms of mitigating IHT as once again it is possible to reduce such potential liabilities, if it is expected that the cottage will never return to agricultural use in the future.

Holiday homes - UK
So far as UK holiday homes are concerned many clients will now have the potential double whammy of liabilities to both IHT and Capital Gains Tax (CGT) on a sale of such a property. Not surprisingly we advise many clients on the ownership structure on the family’s holiday home in the UK in order to mitigate these future charges. Particularly on recent purchases, it is still possible to use Family Trusts as a vehicle to hold properties tax efficiently or alternatively consider shared ownership arrangements between at least two generations of the family thus avoiding a significant aggregation of the property’s value in say, the elderly parents estates.

Holiday home – overseas
Assuming the current owners are UK domiciled and resident HMRC will also be seeking to charge IHT on any value held directly or indirectly in overseas properties as at the date of death but in addition there will also be local taxes to be considered in the country where the property is situated. This, coupled with the specific legal structure of the country concerned makes planning for UK IHT much more difficult.

It is clear from recent Treasury projections that the IHT yield will now increase significantly over the next 5 years or so as a result of the IHT charging provisions on properties (of all descriptions) and there is unlikely to be any intention to increase significantly the IHT threshold which currently amounts to only £285K. For those families with a variety of property interests the actual legal ownership and tax structures holding such properties will be vital in avoiding future IHT charges so planning is essential both when a new acquisition is being considered but also reviewed periodically when there is any change in the family’s personal circumstances.

Nigel Shaw is a member of the Society of Trust & Estate Practitioners (STEP) and is the Director in charge of Trust and Estate services at Garbutt & Elliott, Chartered Accountants Leeds (0113 273 9600) and York (01904 464100) he can also be contacted at nshaw@garbutt-elliott.co.uk.