Writing for Taxation magazine, BKL tax adviser Terry Jordan answers a reader’s query on eligibility for business property relief on partnership land.
‘I act for a father and son farming partnership. Some of the land that is owned personally by the father and used in the partnership may currently carry some hope value and could start to show some significant development value in the future. A proposal to transfer the land into a trust is being considered. Holdover relief would be available for capital gains tax purposes but the transfer would be a chargeable lifetime transfer for inheritance tax purposes. Agricultural property relief will be available against 100% of the agricultural value of the land and business property relief will be available against 50% of the non-agricultural value.
I am wondering whether it would be possible to transfer the land into the partnership and hold it for at least two years before transferring it into a trust when it would then qualify for 100% business property relief.
My concern is that, if the land is transferred to the partnership, the father will no longer own the land himself but will own an enhanced interest in the partnership instead. As a consequence, I am not sure whether the father holds the land in a way that would allow a transfer into a trust that qualifies for 100% business property relief.
If the father were to withdraw the land from the partnership after two years to transfer it into a trust would the land stop being a partnership asset at the point it is withdrawn from the partnership and so not qualify for 100% business property relief on the subsequent transfer into a trust?’
Query 19,188– Sonata.
Reply by Terry ‘Lacuna’ Jordan, BKL
‘There is an argument that IHTA 1984, s 106 would be satisfied immediately as long as the father has been a partner for at least two years. Reference might be made to Dymond’s Capital Taxes at 24A.219.
When I was in the Inland Revenue’s Policy Division we were regularly lobbied to afford business property relief to assets used in businesses and not just to the businesses themselves. The 1977 capital gains tax retirement relief case of McGregor v Adcock [1977] STC 206 was cited.
The case of HMRC v Nelson Dance Family Settlement Trustees [2009] STC 802 rather overthrew conventional wisdom in the context of inheritance tax business property relief. In that case, a sole trader farmer transferred farmland to a trust. The land itself was not an interest in a business but its value was attributable to the value of the farming business which was relievable property: See the article ‘A merry dance’ by James Kessler QC and Oliver Marre (Taxation, 19 March 2014).
If the land is to be transferred in isolation, do not overlook the retention rules in IHTA 1984, s 113A(3)(b). If the father dies within seven years of the transfer, the relief would be revisited and denied. This is because, on the notional transfer by the trustees, the donee’s business would have ceased and business property relief would not be available to the land alone. However, in such circumstances an immediately chargeable transfer is usually better than a potentially exempt transfer because the value of the gift is not aggregated with the death estate due to IHTA 1984, s 113A (2).’
This article is also available on the Taxation website.
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