by Rebecca Horne-Smith
While Inheritance Tax is an inescapable and unwelcome burden on an increasing number of estates, if your estate includes a farm, there are some very helpful reliefs to be had. There are however significant hurdles to ensure that these can be claimed, and the correct decisions early on can mean the difference between a bountiful harvest for the taxman and a less fruitful one.
Inheritance Tax (IHT) is charged at 40% on the value of Estates exceeding the available nil rate band (£325,000 currently). Up to an additional £175,000 main residence nil rate band is also available where a qualifying interest in a property is closely inherited e.g. by a lineal descendant. In the event of a surviving spouse or civil partner, it is possible to claim any unused nil rate band and main residence nil rate band, thus spouses, or civil partnerships with a collective Estate worth less than £1m will not need to pay IHT.
However, with the appreciation of land and property values in recent decades, and the lack of inflation on the nil rate bands in this same period, this threshold is being exceeded more now, even by those who may have considered their Estate’s relatively “modest”.
It’s no wonder that anyone who may exceed either the £500,000 (individual) or £1m (spouse & civil partner) nil rate band thresholds are seeking advice on how to mitigate their exposure and ensure wealth is passed down before it’s too late.
Tax reliefs for Farmers
There are often two very lucrative reliefs for Farmers. Agricultural Property Relief (APR) and Business Property Relief (BPR) can provide up to 100% relief on the capital value of the business and its associated assets.
However, when you look at the specifics surrounding the conditions that need to be met to satisfy either APR and/or BPR, there can be many pitfalls that can ultimately result in relief being denied in full, thus leaving the value chargeable at 40% IHT and sadly, this may require assets being sold to pay liabilities.
Common Areas Where Attention to Detail is Key
Whilst tax is only one factor to consider, when that tax rate is 40% and knowing there are significant savings to be had by maximising those reliefs available, it’s important to understand the conditions required and, if applicable, make any adjustments now to secure these reliefs.
Common areas that can often lead to relief being denied either in part, or in full, are:
- Reduced trading activity winding down in retirement – this can lead to the wholly and mainly test not being met for BPR, especially where there is diversification of assets, e.g. holiday lettings
- Diversification – whilst this has been vital for so many to ensure the business’s continued success in recent times, this can have a negative impact on those reliefs available.
- Occupation, ownership and use of the assets – If the claimant lives in the farmhouse, but is not involved in farming the land, the farmhouse will not qualify for APR, although the farmland may still be eligible. In order for farm buildings to qualify for APR, they must be in use for agriculture and not left empty or derelict. A building that is let for some other commercial use will also not qualify for APR. If farm buildings are too remote from the farm there could be a question mark over whether these are being used for agricultural purposes.
- Livery Stables – whilst the livery business will be declared as such for income tax purposes, this venture can often fall foul of the conditions required for APR and BPR.
- Corporate Structures –group structures and how assets are held can have added complexities when looking at APR and BPR
- Agricultural Value vs Market Value – whilst APR is available at 100%, this is only against the agricultural value, which can often be lower than the asset’s true market value. BPR can cover the shortfall between these two values, however, should BPR not be successful, IHT could be due.
HMRC Increased Investigations of Agricultural Property Relief (APR)
It has been noted that HMRC has stepped up investigations into claims for agricultural property relief (APR), with a 28% jump in the number being scrutinised in the 12 months to 31st March 2022. This may be due to things getting back to normal after Covid-19, but owing to the amount of relief available – up to 100% – it’s not surprising that HMRC would concentrate their efforts in this area.
To qualify, the land must be used for agricultural purposes, such as growing crops or rearing livestock, for two years (if occupied by the owner) or seven years, before it is passed on.
HMRC will investigate claims when it suspects land is not being farmed commercially. Investigations are triggered by a number of reasons, from farmworkers’ cottages being used as holiday lets to question marks about the occupation of a farmhouse.
When you are a farmer, the running of your business is a way of life. Often, when you look at the farm overall, it can be assumed that the land, buildings and all the plant and machinery are part of the business as a whole, and will therefore qualify for these reliefs when someone passes away.
However, as identified above, this isn’t always clear cut but with careful consideration to the rules, and with guidance from us surrounding your specific circumstances, our advice can help ensure such reliefs are maximised, as well as providing good succession planning for the continued future of the business.
If you think this area, or Inheritance Tax in general, is of concern or interest to you, we can offer a comprehensive, bespoke review of your IHT exposure and recommend ways to mitigate a potential liability. Please get in touch with one of our inheritance tax experts or to discuss your requirements for more general accountancy services for farmers.