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One of the biggest risks to the future of a landed estate is tax and specifically the inability to meet a liability without recourse to a sale of core estate assets. Taken to an extreme, unplanned tax charges can result in an estate having to be sold off or broken up to meet the liability.
It is easy to see how an untimely death can have this result when inheritance tax is charged on the market value of assets at 40%, or even just from a decision to give the estate to the next generation without advice, which could inadvertently result in a 20 to 28% capital gains tax charge. Without exception every owner of a landed estate should plan for inheritance tax at the earliest possible stage and seek to take control of this unpredictable liability.
The scope of tax legislation affecting landed estates is very broad, but the main taxes affecting succession are inheritance tax and capital gains tax as they generally apply to transfers of wealth in lifetime and on death. The nature of a landed estate, usually comprising business and agricultural assets, puts them squarely within the scope of valuable tax reliefs, particularly business property relief (BPR) and agricultural property relief (APR). Therefore, with planning and care, there is usually scope to mitigate or defer IHT and CGT enabling transfers of wealth with minimal tax. Advice will always be needed on the conditions and to avoid pitfalls. The complexity of all these issues puts them well beyond the scope of this short blog!
With rising land values, a consistent theme that we are seeing is landed estates seeking to boost their businesses to ensure that as much value as possible can qualify for BPR through trading, since BPR is capable of relieving a wider range of assets than APR. Many estates will therefore need increasingly to trade in order to mitigate IHT on succession.
BPR is also capable of providing 100% IHT relief on businesses which comprise a mix of trading assets and investment assets. At present, such businesses only need to be ‘mainly’ trading (which means more than 50% trading in practice) in order for all the business’s value to be relieved from IHT, and thereby relieving investment assets which would not otherwise qualify for any IHT relief. Advice from an accountant will usually be required to ensure that the business remains on the ‘mainly trading’ side of the line, but the IHT rewards can be considerable.
This type of planning is common for landed estates and can even extend, in the right circumstances, to a claim that, in the overall context and on satisfying certain conditions, the whole estate comprises a single composite trading business under the principles established in the case of “Balfour”. The upshot of a successful Balfour claim is extremely significant as the whole estate should qualify for BPR enabling it to pass free of IHT. Where the possibility exists for Balfour planning it should be factored into the long-term management plan for the estate as the early implementation of a strategy designed to strengthen a Balfour argument will likely have a greater chance of success – much of the evidence needed to prove a claim will need to be accumulated over many years.
Landed estates may also sit in the enviable position of having outstanding land, buildings and/or art which might qualify for conditional exemption from IHT. Such assets can then pass down the generations entirely exempt from IHT, effectively removing altogether the need to worry about IHT on them. While this can be extremely helpful from a tax perspective, the trade-off might be having ongoing conditions to satisfy, with breaches potentially triggering penal clawback charges.
Estates are at an advantage usually in being able to access reliefs and exemptions, but it should be borne in mind that the need to meet conditions for them to apply can be restrictive and increase management complexity. It is therefore necessary to have the tax planning rationale in mind when considering new actions so that strategies that were carefully implemented are not subsequently tainted. Having ongoing input from an adviser will help with all of this.
FURTHER INFORMATION
If you would like any further information or advice about the topic discussed in this blog, please contact Charles Richardson in the Private Client team.
ABOUT THE AUTHOR
Charles is a Partner in Kingsley Napley's Private Client group and leads the firm's Landed Estates practice. Charles joined Kingsley Napley in 2022 from Hunters Law LLP, where he began his career and became partner in 2018. He has a well-established general Private Client practice, advising individuals, families, trustees and executors, with an emphasis on complex lifetime tax and succession planning, often with an international element.
Succession to a landed estate blog series
Part 1
Setting the scene for solutions
At Kingsley Napley, succession planning is at the heart of our private client team’s work and that includes succession planning for the owners of landed estates. I was asked to speak on this subject recently at the second edition of the Thought Leaders 4 Landed Estates & Farms Tax Conference, which was attended by some of the country’s leading advisers to landed estates.
Read the blog Part 2
The essential, universal starting point
Certainty of succession – Wills and lasting powers of attorney It almost goes without saying that the owner of a landed estate will have made a Will to direct that the estate passes in accordance with their wishes on death. They will also have put in place lasting powers of attorney so that if they lose mental capacity, there is flexibility for others to effect these wishes.
Read the blog Part 3
Minimising tax
One of the biggest risks to the future of a landed estate is tax and specifically the inability to meet a liability without recourse to a sale of core estate assets. Taken to an extreme, unplanned tax charges can result in an estate having to be sold off or broken up to meet the liability.
Read the blog Part 4
Preserving and improving the estate
Running an estate is a long-term project and even with a clear aim, the succession plan is bound to encounter unexpected challenges, such as a law or family change. To provide the best opportunity to thrive, I find that setting and sticking to principles, and applying a disciplined, consistent approach normally pays dividends.
Read the blog We welcome views and opinions about the issues raised in this blog. Should you require specific advice in relation to personal circumstances, please use the form on the contact page.
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