APR under the spotlight in inheritance tax review
The Parliamentary Group for Inheritance and Intergenerational Fairness has been looking at IHT since February 2019 and has come up with some wide-ranging recommendations including reducing the current 40% inheritance tax rate to 10 – 20%, removing the tax-free CGT uplift on death, and abolishing APR and BPR. The latter recommendation, if implemented, will have major implications for farmers (although there is no indication that the government is in a hurry to do so). For now, it is a question of watching and waiting to see what the government decides to do; to date, there has been a marked reluctance to instigate radical reform of IHT. Nonetheless, the proposals are worth bearing in mind, particularly if planning to embark on a tax planning exercise in the near future.
Changes to CGT on residential property sales
From April 2020, the Capital Gains Tax (CGT) payable on the sale of residential property (except for your main residence) will be due within 30 days of completion. At the moment, CGT on residential property is payable by the end of the relevant tax year so the change is considerable – and failure to settle within the deadline will attract penalties from HMRC. The new rules apply to everyone selling residential property, including trustees and executors. In another change, the last 18 months of your home ownership, which currently qualifies for CGT relief even if you are living elsewhere (for example you have moved house and are renting out your old house because it’s proving difficult to sell), is being reduced to 9 months from April 2020. Finally, lettings relief, which reduces the gain made on a sale of your home if it were let to a tenant at any point, will only apply if you share occupation with the tenant.
Changes to intestacy rules
If someone who is married with children dies without a will, their estate is subject to the intestacy rules. These state that the deceased’s spouse will receive a statutory legacy, the house contents and personal effects, and half the balance of their estate (with the other half shared equally between the children). From 6 February 2020, the statutory legacy to which a spouse is entitled increased from £250,000 to £270,000. Many people often don’t get round to making a will because they mistakenly assume that their spouse will automatically receive everything, even if they have children (unless the total value of their estate is less than £270,000). The only way to determine exactly how you wish your estate to be distributed after you die is by making a will (although always remember to make, or review, your will with the farming partnership agreement to hand if you have one).
Capacity and care home fees for farming partnership
In the case of sudden or gradual mental deterioration, the question of capacity of a family member or partner often doesn’t arise until it is too late. Without a power of attorney in place (Lasting Power of Attorney or an Enduring Power of Attorney), you may have to apply to the Court of Protection for the necessary authority to deal with any assets and to enable the farming partnership to continue operating. Although time-consuming and costly, such an application may be the only way to achieve the best outcome for the family member/partner and the partnership. We cannot emphasise enough the importance of facing up to the possibility of mental incapacity in order to lessen the impact on a farming partnership arrangement.
The sale of assets or the realisation of a partner’s share in order to fund care home fees or domiciliary care can have a catastrophic effect on the business. A well drafted partnership agreement can help and the earlier you take advice, the easier it is to put the right provisions and support in place. We can talk you through the care process, including when and how much you should pay, should assets be sold to pay for care, contributions from family members, and how to ensure that the care placement is the right place providing the right care.
How do you own your property?
In these days of increasingly complex family structures and high house prices, the way in which you own a property jointly with a spouse or partner is significant. At purchase, people are asked if they want to own it as a ‘joint tenants’ or ‘tenants-in-common’ and there is an important difference between the two. Joint tenants (usually spouses or co-habitees) each own 100% of the property so, if one dies, the other continues to own 100%. Neither owns a distinct share so cannot pass it to their beneficiaries as part of their estate. Given the likely value of the family home, owning it as joint tenants could mean future trouble as the surviving spouse / partner could leave it to whomsoever they wish. With the increase in second families, the law of unintended consequences could prevail with the house being left to the ‘wrong’ beneficiaries. On the other hand, tenants-in-common (usually friends, siblings or business partners) each own a distinct share (usually 50-50 although the ratio could differ to reflect individuals’ financial investment). This share is theirs to leave in their estate as they wish. We would advise everyone to consider buying as tenants-in-common, regardless of their relationship, as it gives you complete discretion to leave your share of the property to whom you wish. You can review your ownership arrangements and sever a joint tenancy at any point.
As a trustee, do you know your responsibilities?
It is common for trusts to hold properties, or shares in property, which are occupied. Trustees are generally required to hold the property for the beneficiaries, acting in the latter’s best interests by protecting and preserving it. However, as most trusts do not have cash assets to fund the trustees’ costs of doing so, most trustees tend to rely on the occupier of the property to look after it. Nonetheless, the trustees are ultimately responsible for ensuring the property remains an appropriate investment for the trust (and its beneficiaries). A breach of duty can lead to the removal of the trustee from the role and / or trustees can be held personally liable for any loss caused to the trust fund if they fail to administer it properly. Trustees must act in good faith, exercise reasonable care and skill, be impartial with regard to beneficiaries, act unanimously in all trust-related decisions, and keep proper records and accounts (and file required tax returns). Specifically, in relation to property, the trustees must hold the title in their names, make sure it is adequately insured (noting the trust’s interest), and inspect it regularly to ensure it is being kept in good repair.