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When considering the prospects of an uplift in value either through development or the cessation of a tenancy, it is important that you plan ahead to ensure that your tax affairs reflect your objectives for the land.
You should always take appropriate tax advice from an experienced professional; however, there are a number of means by which you could consider planning for both Inheritance and Capital Gains Taxes.
Potentially Exempt Transfers will be familiar to many property owners as a means of gifting land. If the transferor survives for seven years after the transfer then no Inheritance Tax will be payable; however, if they do die within this period the value for tax purposes would be that at the time of the transfer which could be significantly lower than would be the case with vacant possession or development.
The use of a transfer into a Discretionary Trust can also be a tax efficient means of transferring property whilst also serving other strategic objectives. Under these circumstances, if the settlor dies within 7 years then there will be a smaller Inheritance Tax charge which would also be levied on a lower value for the reasons set out above.
In addition, both Agricultural Property Relief and Business Property Relief might apply to mitigate any Inheritance Tax liability. Agricultural Property Relief only applies to the agricultural value of the asset; however, Business Property Relief (if available) might be used to relieve the tax on any hope value. To qualify the property has to be used for business purposes and there is notable case law around this issue now which offers useful guidance for estate owners.
When considering Inheritance Tax planning, the aim is generally to transfer property at a low value and to allow the benefit of any uplift to accrue to the next generation.
Capital Gains Tax
Where a disposal realises a Capital Gain, then a number of reliefs can be used. Where the uplift in value accrues on a business asset then if a disposal coincides with a restructuring of the business Entrepreneurs Relief might be claimed. The effect of this is to halve the tax rate, and currently represents a highly tax efficient means of realising a Capital Gain.
The above always needs to be considered in respect of the implications from an SDLT and VAT perspective as in some instances these can have significant tax implications.
If you would like to discuss any aspect of this article further, please contact James Raynar or any member of the Planning and Development Team.
The information in this article is necessarily of a general nature. Specific advice should be sought for your particular circumstances.
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