Question: I have concerns over the recent ruling regards conacre land and would like some advice with regard my overall inheritance tax position. What should I do?
Answer: I normally say this at the end but this time I will say it at the outset. The most important thing to do is to seek out some professional help, and ensure that your current position is fully understood and that any planning steps that are subsequently taken match your overall objectives.
The whole issue of inheritance tax and conacre land is causing concern among a wide group of people. Conacre is a unique system to these shores and it is estimated that around a third of land owned here is on a conacre basis. As you are aware, a recent court ruling has now thrown numerous individuals into disarray as assets that were thought to be exempt from inheritance tax under Business Property Relief rules, are now likely to be subject to tax.
The problem with illiquid assets such as land and property is that there are limited solutions that can be investigated in order to plan to avoid any unnecessary tax. The classic view is that there are three ways to mitigate inheritance tax. Firstly you can give the assets away. Secondly you can fund the payment of the tax, usually by investing in an insurance policy that is written in trust and therefore falls outside your estate. Finally you can spend the monies so as to deplete your estate. All of these options have their merits, with many looking to the first option of gifting as the solution to the problem. Gifting an asset such as land can be effective but it can lead to further complications such as giving rise to potential capital gains tax, not to mention the other issues of giving away rights to income when the asset is passed from one generation to another. Some people are also reticent of gifting assets for fear of a subsequent marriage breakdown which may ultimately mean that assets are given to unwanted former in-laws.
In the past control could be exercised over gifts by placing them in trust rather than making an outright gift, however again the government have clamped down on this by the introduction of taxes on trusts when they are established and throughout their existence.
Further, once an asset such as land is gifted, the individual has to survive for a period of seven years for the gift to be fully effective from an inheritance tax perspective. So once again the donor needs to consider setting up some life assurance to cover any tax that may arise between gifting and the subsequent seven year period.
If you are looking to re-arrange some assets, including the land, then there are inheritance tax mitigation investments that could also be worthy of consideration. In particular there are a number of offerings that qualify for Business Property Relief, ironically the very relief that has been the cause of the conacre issue. If an asset qualifies for Business Property Relief, then as long as it is held for two years, then any value it contains is outside an estate for inheritance tax purposes. This can be particularly attractive for monies that have resulted in the sale of land.
The issue of investing in a life assurance plan should also be explored. If health is good or at worst average, then the investment premiums can be affordable and prove good value for money, as well as providing immediate coverage should a large tax bill arise.
But I finish where I started, the first step is to seek out professional advice.
Raymond Mulligan is managing director of Johnston Campbell, a company of independent financial advisers regulated by the Financial Services Authority. For further information, please contact email@example.com or (028) 9022 1010.