Country houses for sale

Briefing: country houses and tax

Knight Frank has put together a useful round up of what we know so far, pre-general election, about tax strategies which may affect country house owners, and property owners in London

Politicians are gearing up for a General Election next year, which means we will gradually learn more about parties’ intentions, the report points out. For instance, it says the Labour party was quick to deny recently that leaked proposals from one of its special advisors to implement business rates on agricultural land and buildings was official policy, but that this shows the current political mindset.

In Scotland, the latest report from the Land Reform Review Group also mooted extending the rates system to cover agricultural and sporting properties, as well as questioning some of the tax reliefs available to farm and estate owners. So far, the coalition itself has not publicly suggested anything as radical, but in the background questions are clearly being asked about tax reliefs in general and whether they can be justified, Knight Frank has briefed.

According to a report published by the National Audit Office earlier this year, there were 1,128 tax reliefs available as of December 2013. Interestingly, the report made specific reference to the use of Business Property Relief (BPR) and Agricultural Property Relief (APR) as two of the ‘tax expenditures’ that commonly reduce or remove liability to Inheritance Tax (IHT).

Although the report helpfully acknowledged the purpose of these reliefs – ‘to ensure that family businesses do not have to be broken up’ – it also tellingly mentioned that the cost of the reliefs had actually risen faster than the amount of IHT collected, as well as noting: ‘The reliefs are regularly cited by firms that undertake tax planning as ways of reducing inheritance tax that are relatively easy to use.’

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Knight Frank suggests that even if the reliefs themselves are not being questioned at the moment, thta any estates planning to use APR or BPR as part of their tax-planning strategies need to consider carefully taking advice as to what that might mean for them.

It seems that the government could also be planning to tighten up the rules on which of a person’s homes can qualify for Principal Private Residence (PPR) relief from Capital Gains Tax (CGT).

One of the suggestions is to remove the ability to nominate which property you would like to qualify for the relief and use instead a set formula, possibly based on the time spent at each property. In theory, if the legislation is badly worded, it could unfairly hit somebody who owns a large family home in the country, but spends the week working in London and living in a flat there.

In addition to this, the scope of the Annual Tax on Enveloped Dwellings (ATED) is also changing: the yearly charge and CGT levy on residential property owned by corporations and other ‘non-natural’ persons will apply to homes worth over £1m from April next year, and on homes worth more than £500,000 from April 2016.

At present, it only applies to properties worth over £2m. Genuine farmhouses will be exempt, but some estates that have been incorporated could be affected. In addition, the sale of property owned by people living overseas will fall within the scope of CGT from April next year (on any gains arising from that point), another issue to consider for many of my clients and their advisors.

And, of course, the mansion tax still looms. Because the £2m threshold has remained the same since the idea was first proposed in 2009, many more houses will would be drawn into the net should it be brought into effect.