IN the last column, I highlighted changes to Agricultural Property Relief (APR) for inheritance tax following the European Commission’s directive that the UK Government was being discriminatory in applying the relief only to agricultural property and forestry owned in the UK. The Chancellor has now extended APR to apply to relevant inherited property across the EU.

Obviously fearing a similar directive on Furnished Holiday Lettings (FHL), the Government has also extended this relief to European properties until 2010-11 when all the income tax and capital gains benefits for such businesses are repealed unilaterally.

The qualification of these businesses for all income tax and capital gains tax reliefs emerged in 1983 to encourage farmers and landowners to utilise redundant cottages on their land. These tax reliefs have been a boon to the tourist industry, the rural economy and coastal communities. Again, the reliefs were limited to UK assets, prior to the new shortterm extension into Europe.

Immediate Government reaction to this issue would be preferable to waiting for a further directive from Europe. However, this could result in increased long-term investment outside the UK, which could be costly to our economy. Future investment abroad would produce a better income return for owners because of the longer holiday season. However, it would also result in a lower tax return for HMRC because of our tax treaties with other countries.

This is perhaps why the Government has decided to abolished the relief.

This has to be a terrible blow for the rural economy and UK tourist industry.

For inheritance tax, property owners would usually have a good claim for Business Property Relief (BPR), but I cannot see how BPR can survive once such properties are taxed as investments again and the capital gains relief is withdrawn.

The survival and extension of APR may only prevent short-term further damage to the farming industry, especially as there is a reduced threat from further growth in the “lifestyle farmer” phenomenon because of the economic climate.

Now is the time to check land deeds and partnership agreements, as well as tenancy/licence agreements to protect both forms of IHT relief for future generations, and to ensure that owners’ wills protect the position for both farming and non-farming children.

■ Val Hutchinson is an inheritance tax specialist with BHP Law. She can be contacted on 0191-221-0898.