As the full impact of the complications of additional Residence Nil Rate Band (RNRB) for inheritance tax (IHT) begin to be understood by the farming community, it is key to look at the farmhouse and the RNRB.
Despite the current IHT review considering the RNRB, it is essential to look at maximisation of this relief in the context of farms.
Following the clarity shown by the Antrobus 2 case, the inheritance tax (IHT) relief on the farmhouse is restricted to agricultural value (AV), ie the agricultural property relief (APR) is restricted to AV. The problem with the RNRB is that it does not apply to estates over £2 million (subject to tapering) before APR is applied. The RNRB is tapered down by £1 for every £2 that the estate exceeds £2 million. Most farms do exceed £2 million in value on death, so the RNRB might not apply, but the farmhouse may qualify for RNRB if the estate was kept below £2 million (subject to tapering). The non-AV of the farmhouse can qualify for IHT relief using the RNRB. Calculations should be carried out with up-to-date values when trying to plan the maximisation of the RNRB. Once again this shows the importance of a quality valuation.
The RNRB is limited to one residential property and cannot be applied over various properties. Where there is more than one residential property in the farmer’s estate, the executors can nominate which one should qualify for the relief. Such an election puts another pressure on executors. The residential property must have been occupied by the deceased as a residence at some point in time, but does not have to have been their main residence. Such leniency regarding properties could be of benefit to farmers who might have moved a number of times on the farming estate. It should be pointed out though, that provided the conditions are met, the RNRB in effect is just an additional allowance to set against the whole taxable estate.
If the estate is worth more than £2 million, farmers can review whether it is possible to arrange their affairs so that the RNRB can be claimed. If a couple’s combined assets exceed £2 million, then they should seek advice to see if their Wills can be updated to avoid any ‘bunching’ effect on the second death – for example, farmers could revise their Wills so that part of the estate of the first to die is inherited by their children thus taking advantage of APR and business property relief.
Valuations of farms and estates, with a view to the calculation of possible future IHT liabilities, will be needed. With regard to farm valuations, it is imperative to have valuations of both full market value and AV, including the farmhouse. This will reveal the total values, weak areas, and possibilities for lifetime transfers, if any.
There is increased pressure to review Wills in the context of the residences on the farm and the need to ensure the Wills are ‘RNRB efficient’ where possible.
Lawskills 16 August 2018