Tax protection of ‘amenity value’

 In Tax

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Tax protection of amenity valueAll tax advisers are prepared for the concept of ‘hope value’ and the need to put tax protection in place. This ‘hope value’ is the difference between agricultural value (AV) as defined by section 115(3) IHTA 1984 and market value for the purposes of probate or lifetime transfer (section 160 IHTA 1984). Essentially ‘hope value’ is the value of potential development opportunity. By contrast ‘Amenity value’ is generally considered to be where the property is located in a desirable area and an additional price is achieved because of location rather than development potential.

‘Hope Value’

Professional advisers should be prepared to protect against HMRC’s attempt to include ‘hope value’ on farmland by ensuring the client has full 100% business property relief (BPR) for Inheritance Tax (IHT).

For partnership’s trading from the land in order to qualify for 100% relief the land must be partnership property. If the land is held outside the partnership the rate of BPR is only 50% and the owner has to have ‘control’. The land must therefore be used in the trade and it must not be let through a tenancy, a licence or a very vulnerable grazing agreement which does not amount to trading activity.

Post Brexit the farming industry will have to restructure and reassess its markets, production, methods and of course reliance on subsidies. Such considerations will be a great opportunity to ensure updated legal agreements and tax efficient trading arrangements are in place.

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Valuation considerations are on the basis that hope value is potential development value and the land is going to be developed and sold in the relatively near future. Therefore, the probate value (market value at the date of death) will be the starting point for the base cost for capital gains tax (CGT) for the beneficiaries of the estate on death. If no IHT is payable on death this is not guaranteed.

Provided 100% BPR for IHT is achieved, then the executors are generally content and prepared to embrace a high hope value figure giving that it is likely to be the base cost on which the CGT computation will be prepared when they sell the land.

Whilst many valuers fight the concept of ‘hope value’ as difficult to quantify and many have said that it is like ‘taxing air’, such a worry does not exist provided there is 100% BPR for the landowners. The tax planning point is therefore that provided 100% IHT relief can be achieved on the potential development value this will in turn help the future CGT computation liability by providing a high base cost.

‘Amenity Value’

A problem then arises with ‘amenity value’ a term often argued by the District Valuer (DV). ‘Amenity value’ is generally considered to be where the property is located in a desirable area. The greater the desirability, the greater the value. Such a term is not the ‘hope value’ of the future development of the land, but just a high value arising from location etc; it is indeed a rather ‘vague concept’.

With hope value the land that is under scrutiny must have potential to be developed, the land must be an obvious candidate for planning permission or there must be planning permission already achieved. For hope value there must be a clear prospect of some development.

However, with amenity value the consideration for increased value can just be location. HMRC have woken up to the amenity value concept and are therefore challenging the ability of amenity value land as far as IHT relief is concerned.  Agricultural property relief (APR) is limited to the agricultural value of the land (section 115(3) IHTA 1984) and therefore not all the value of the land will achieve 100% IHT relief. The argument in favour of the taxpayer would be that ‘market value’ is the same as the agricultural value of amenity value land as farmers are willing to pay the high price for the land in a particular location.

There are a considerable number of elderly farmers still owning land. There are large numbers of letting arrangements in place when they should be active farms and can be made active with help from family members, potential beneficiaries etc. The importance of the trading function which needs to be in place to maximize reliefs cannot be underestimated and advisers and those who produce the Accounts and Tax Returns need to be alert to the problem of too much letting activity by the landowning community and also the impact of the resulting tax disadvantages.

Post Brexit, as a result of the negotiations, there will be considerable changes to farming at every level and one of these must be to consider the replacement of the let activity with trading in hand in a structured way. The goal is protection against undue IHT being due on the farmhouse and also being due on the ‘amenity’ and ‘hope’ value by being able to claim 100% BPR on the land in the same way as for hope value.  The concept of amenity value at a general level and the punishing attempt by HMRC at tax collection must be considered by all advisers.

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