The Gazette 1979

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GAZETTE APRIL 1979
These Taxes were introduced by the Capital
Acquisition Tax Act 1976. As the title of the Act implies
they are taxes on the acquisition of property. There are
two taxes involved — a Gift Tax which is payable on any
taxable gift taken on or after 28th February 1974, with
the aggregation of any gift taken on or after 28th
February 1969 thus exceeding the thresholds; and an
Inheritance Tax payable on any taxable inheritance taken
on or after 1st April 1975. Both taxes apply to that
portion of the aggregated gifts and inheritances exceeding
a stated threshold. When the Act was being introduced
these thresholds were generous and a more than fair
substitute than the old Death Duties. In the case of a
spouse or child the threshold was and remains
£150,000.00 each. And in the case of "genuine" farmers
the method of valuing agricultural property effectively
increased this in the case of a spouse or child to a
maximum of £250,000.00 subject to two main
qualifications — (1) the Beneficiary should be a
"genuine" farmer, i.e. he must be domiciled and
ordinarily resident in the State and his gross assets after
the gift of inheritance i.e. land, livestock, bloodstock and
farm machinery had to comprise 75% of agricultural
property or transfer by the farmer under a compulsory
acquisition, and (2) there could be no sale within six years
unless the property was replaced. Because the 75%
calculation is made after the gift or inheritance the donee
can be converted into a "genuine" farmer by the gift or
inheritance itself. I do not intend to go into detail in
regard to other thresholds outside the cases of spouses
and children but we can answer any questions on these
later. In the case of spouse and children and in the case of
an inheritance the first £50,000.00 over the threshold is
taxable at 25%; and the rate of tax rises by 5% for each
successive £50,000.00 until we achieve a rate of 50%
The same thresholds apply to Gift Tax but the rate is
reduced to 75% of that amount payable for Inheritance
Tax provided the person making die gift survives for two
years.
Back in 1974 and 1975 we were talking of values of
£600 to £800 an acre for good agricultural land and it
was possible to transfer or bequeath in the region of 300
acres to a wife or child without liability for either of these
taxes. To-day the same land is worth £3,000 an acre or
possibly more. This inflation in the value of the land has
so eroded the thresholds that it is not now possible for a
farmer to make a transfer of 100 acres of good land to a
son without substantially exceeding the threshold. A mere
transfer of 100 acres on this basis without stock or farm
machinery would involve tax on £50,000.00 which in the
case of an inheritance would be £12,5000.00 or in the
case of a transfer during the life of the donor £9,375.00.
This creates a problem which is potentially far more
serious and far reaching for the farming community than
either Income Tax or levies. It may make it very difficult
for the farmer — in some cases even impossible — to
pass a moderate size farm of say, in the category of 100
to 150 acres unto a son without Inheritance Tax or Gift
Tax of almost penal dimensions; and this in turn is, of
course, aggravated by the reduction in a farmer's real
earning capacity due to Income Tax and any levies.
Avoidance
This brings us to the central point of my talk — the
64,000 dollar question. What can be done to avoid or
reduce liability in respect of these taxes? On the political
side farmers can, of course, campaign either for an
increase of the thresholds or the agricultural allowances
or both. In the meantime, however, we must play the
game in accordance with the present rules. While liability
cannot always be avoided it can very frequently be
reduced and sometimes totally avoided by the proper
arrangement of one's affairs. This is done by the use of a
will, transfer or settlement that makes the maximum use
of the thresholds and allowances.
A farmer can for example distribute 1-j- million pounds
worth of agricultural property without any liability
between a wife and five children provided he leaves the
property equally to them and each of them qualifies as a
"genuine" farmer. This illustration is, however, over
simple because we rarely meet the situation where it suits
to distribute agricultural property equally on these lines.
The principle remains valid, however, that as far as
possible in each case the thresholds are fully used. In this
context it can be very important to use the threshold of the
wife; apart from the fact that such a bequest to a wife will
make very ample provision for her, it may help to pass on a
further £250,000 free of liability between one or more
children. At this stage I would like to give a few examples
that will illustrate the type of arrangement that on the one
hand will result in unnecessary liability and on the other
hand will avoid or very substantially reduce liability.
Examples
1. Farmer 'A' is married with wife and four young
children. He owns a farm of 180 acres fully stocked. Total
value of all his assets £600,000.00. He dies without making
a will. Wife is entitled to £400,000.00on which she will have
to pay Inheritance Tax of £45,000.00. Children get
£50,000.00 each — NoTax. Apart fromTax on4 A's' death
this still leaves the following problems for4 A's' family. If the
farm is to go to one of his sons — His wife has to make over
her share and the other three children, if agreeable, have to
make over their shares — possible further tax (£150,000
surplus from wife £45,000.00; £30,000.00 surplus from
brothers and sisters — £4,760 x 3 = £14,280.00) in region
of £60,000.00.
2. Same Family and Assets. In 19704 A' made a
simple will with his Solicitor leaving all his property to his
wife. He died in 1979. Inheritance Tax payable —
£137,500.00. Wife still has the problem of passing the
property on to her children and again if the farm is to go to
one child there will be another substantial tax liability.
3. Same family and same circumstances but 4A' by his
will left his property to his wife for life and then to his
children as she should appoint — a common type of will
to avoid a double set of Death Duties under the Law as it
stood in 1970. The widow is 42 years old. Her
Inheritance is valued at .8204 of the total value, i.e.
£492,200.00. She will have to pay Inheritance Tax
amounting to £83,900.00 (being tax on £242,000.00 the
excess over the threshold of £250,000.00). In the event of
an appointment either inter vivos or by will, further tax
liabilities may arise, depending on the value of the
property appointed.
4. Again the same family and circumstances. On this
occasion, however, his will provides:
1. For the appropriation to his wife of property or a
share in his property to the value of £250,000
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