Budgeting for change: what should Landed Estates be doing before the Budget?

The end of October is normally associated with ghouls and terrors.  This year, for private clients, Halloween may be light relief after the Budget.  Although the media can often be accused of drumming up hysteria ahead of fiscal events, it's hard to dismiss concerns given recent comments by the Prime Minister about there being a painful Budget ahead.  Labour's tax promises to date have also studiously avoided mention of capital taxes.

So what should Landed Estates - or indeed private clients more generally - look to do?  This is a hard question to answer when no one can be sure of what changes, if any, we might see brought into effect on 30 October.  However, if we assume that capital taxes are going to be in the Chancellor's crosshairs, here are some potential planning points with a focus on these taxes.

1) Agricultural and business property relief  

Rumours have abounded for some time that these reliefs may be tightened under Labour.  It is difficult to know what form this might take:

• complete abolition;
• a cap on the reliefs per estate or trust of say £10m;
• a reduction in the rate of relief;
• a claw back in the event that an inherited trading business subsequently stops trading;
• an increase in the required trading threshold. 

The Chancellor's decision regarding how to reform these reliefs is also complex : these reliefs play a vital role in keeping businesses together on death, something which a pro-growth Government must bear in mind.  From a policy perspective, agricultural property relief on let farms must seem the easiest to attack, drawing a distinction between “landowners” and “farmers”.  Hurrying large scale policy change in this area is therefore fraught with risk for the Government.

However, clients with agricultural or business property may seek to "bank" the reliefs whilst they still apply.  For those who own relieved assets directly, or in a trust which treats them as the owner for inheritance tax, they may wish to consider passing the assets on whilst the relief still applies.  

This could take the form of outright gifts to the next generation, or moving the assets into a trust subject to the relevant property regime (which applies a charge, currently at 6%, every 10 years).  Currently, holdover relief from capital gains tax should also be available in respect of relieved assets, although there are complexities to the relief (particularly if they have not been used in trade throughout their ownership) which would need to be considered carefully.

Where interests are being moved into the relevant property regime, clients and their advisers will need to consider if that regime is also likely to face reform.  Although the regime provides certainty as to when tax charges fall (thereby enabling planning and cash-flow management), it may be that the Chancellor is considering raising the 6% decennial rate to something higher.  Coupled with a removal, or restriction of reliefs, the relevant property regime might not end up as sunny uplands.  Indeed, if the individual concerned is young (and therefore the potential tax event of their death is some time away), one might hope to ride out any current reforms, or consider alternative solutions such as insurance.  Given the Conservatives' recent reported flirtations with abolishing inheritance tax, and that inheritance tax as current levied in the UK is uncompetitive compared with many other global estate tax regimes, it is not a huge stretch to imagine this becoming a future Conservative election promise, particularly if Labour has increased the burden of inheritance tax in the meantime.

In all cases, this planning will only work if the individual concerned can forgo any future benefit from the relieved assets (eg income or use of the assets).  This might put this planning beyond a huge number of clients whose financial security depends on their farming and business assets. 

2) Make gifts

Currently, if an individual makes a genuine gift (ie reserving no benefit) to another individual, and survives it by seven years, no inheritance tax is due.  If they survive the gift by at least three years, the potential rate of inheritance tax applicable to the gift starts to fall.  

The gift - or to use its technical name "potentially exempt transfer (PET)" - regime enables parents to support children by passing on wealth during the parents' lifetimes.  The current seven year tail is designed to prevent people from using this regime when they are nearing end of life, as a way of avoiding inheritance tax on death. 

The PET regime could easily be reformed.  It would be legislatively very simple to extend the "tail" to, say, 15 years.  Other options would include capping the amount that can be given away (similar to the regime which currently applies on gifts to trusts) or abolishing it altogether such that outright gifts become immediately taxable. 

It is important that individuals do not make gifts that prejudice their financial security or to make rash decisions based on speculation on Budget announcements.  However, if individuals are already contemplating making gifts, it would be sensible to make them ahead of the Budget and under the current prevailing regime.  This may also have capital gains tax benefits (a gift is a disposal for capital gains tax purposes), as discussed further below.

3) Capital gains tax disposals

Warnings of potential capital gains tax rises have been doing the rounds for years, long before the Labour Government.  Although speculation varies, at its worst, alignment with income tax rates has been suggested.

Clients who have a clear cashflow forecast of capital needs over the next 18 months to two years might wish to consider raising capital now under current rates.  Of course, this strategy should be counterbalanced by the commercial and investment risks of selling in the current market.

A variation of this theme for Landed Estates would be to undertake internal transfers.  Where, for example, an estate has identified an asset which they wish to sell in the near future, and which is standing at a significant gain, they may wish to consider making an internal transfer (ie to another estate entity) in order to secure the current rates of capital gains tax on the existing gain, and expose only future gains to higher rates.  Careful advice will need to be taken though to ensure any transaction costs (such stamp duty land tax) do not outweigh the capital gains tax benefits if the internal transfer occurs for consideration. 

It is also worth noting that we might hear an announcement on Budget day of capital gains tax rate rises with a delayed implementation date of 6 April 2025.  Taxpayers have a high degree of control over when they make disposals and, if the Chancellor were to raise rates mid-year (which is not unknown) to align with income tax rates, she may see the disposal tap turned off to a mere drip.  Perhaps more cunning would be to warn people of a rate rise and hope to encourage a rush of disposals in the following five months as a one-off tax boon for the Treasury.

Summary

We do not know what is around the corner and there is a risk of jumping out of the frying pan and into an unknown fire.  However, as a rule of thumb: 

- where transactions are planned over the next few years, consider if they can be expedited; and

- where the inheritance tax planning to date has relied on agricultural or business property relief, (particularly relief on let farms) consider whether action should be taken now to crystallise those reliefs.

For all private clients, and their advisers, post-Budget is also likely to be a busy period.  If we see a radical reform, or abolition, of the reliefs, we will likely see an increase in alternative planning strategies - most likely those which focus on fragmenting values.  This can involve radically altering the structures of Landed Estate ownership and is unlikely to be something to rush into until the inheritance tax landscape has become clearer.