Inheritance Tax is the tax on wealth held at death plus the value of gifts made in the seven years prior to death. The rate of tax payable on death is 40 per cent and on transfers within seven years of death: 20 per cent – 40 per cent. Each spouse has a lifetime exemption of £325,000. In addition there is the annual gifts allowance of £3,000 per year per spouse and the marriage gifts allowance of £5,000 per parent or £2,500 by a party to the marriage.

In addition to the above allowances there are two major reliefs: Agricultural Property Relief (APR) and Business Property Relief (BPR). Both of these reliefs represent 100 per cent reduction in the value of assets which are occupied for the purpose of farming provided there is sufficient evidence to prove that the asset is occupied for that purpose.

APR, at the rate of 100 per cent, applies to the agricultural value of land situated in the United Kingdom or Isle of Man and used for the purposes of farming or let in conacre. APR also applies to the value of the farmhouse provided that it is of a character appropriate to the land and that the house and land are in the same occupation for the purpose of agriculture but need not be in the same ownership. The Revenue apply a factual test and the onus is on the executors/personal representatives to prove that the owner was an actual farmer and that both the house and land were occupied for the purpose of agriculture. Relevant evidence to support the active farmer test may include bank statements, cheque stubs, annual accounts filed with Revenue & Customs showing trading activity and DARD documents. The annual Balance Sheet should show true value of trading assets and minimise or exclude investment assets.

BPR, at the rate of 100 per cent, applies to the value of the property in excess of its agricultural value. It only applies to assets used in the course of a trade; it does not apply to land let in conacre. Again, like APR, the onus is on the executors or personal representatives to prove to Revenue & Customs that the asset was used for business purposes.

In addition to the allowances and reliefs already mentioned, there are many inheritance tax planning opportunities open to the taxpayer. For example, if there is a significant amount of surplus cash investment in the estate, the using of some or all of this cash to purchase shares on the Alternative Investment Market (AIM) will result in BPR at 100 per cent provided the shares are in trading companies and are held for two years. The formation of a Discretionary Trust can significantly minimise inheritance tax and, at the same time, allow the owner some degree of control. If the business trades as a limited company and a director’s loan exists in favour of the director, this is an asset liable to inheritance tax. However, if the director’s loan is transferred into redeemable preference shares, then, after two years, BPR applies.

Inheritance tax planning is a key ingredient in succession planning and in ensuring the sustainability of the farm business. In order to avail of the many allowances and reliefs available to reduce inheritance tax, regular contact with the solicitor and accountant is necessary to ensure that appropriate evidence is maintained to support a claim for reliefs.