Jonathan Crowther acts for several farming clients and is frequently asked questions about how to pass on the farm and to explain ways to minimise Inheritance Tax. Understanding this complex area of tax is the first stage of a planning process. This article provides straightforward answers to many commonly asked questions.
With agricultural land values increasing and the value of farmhouses at a premium, it is vital that farmers do not lose their possible reliefs by unwittingly changing the nature of their business. There are many traps for the unwary or uninformed!
Let’s explain some abbreviations before we begin…
Abbreviations used in this article:
IHT – Inheritance Tax is paid on Estates valued over £325,000 for 2009/10. Tax is usually paid at 40% on the balance above this level. Husbands and their Wives both have a nil rate band (currently £325,000) and effectively any unused element on the first death can be utilised on the second death.
BPR – Business Property Relief is given on the total value of any property which qualifies as business property (as compared to the agricultural value). The rate of relief is 100% for assets owned and used in the business, and 50% for assets which are “off balance sheet”. To obtain relief the asset must have been owned for at least two years.
APR – Agricultural Property Relief is given on the agricultural value of land or buildings. The rate of relief is 100% or 50% as explained later and can effectively exempt assets from a charge to IHT.
So to the frequently asked questions …
What is the Farmhouse Issue?
In order to qualify for APR, the farmhouse must be:-
Occupied for the purpose of agriculture, and
Of character and appropriateness to the land holding to which it is attached.
As many farmhouses are the most valuable farm asset, HMRC are looking at situations where relief has been claimed. They will often contend that the farmhouse is worth more than its agricultural value and attempt to restrict the APR to a percentage of its market value, often 70%.
What is a Farm cottage?
Normally the HMRC contend there is only one farmhouse on a farm. All other houses are considered to be farm cottages. Where a cottage is occupied by an agricultural worker or a retired employee, or widow, then normally 100% APR will apply. Where a cottage is let out on an assured short-hold tenancy, even if it was built with an agricultural planning restriction, it will not be agricultural property and no relief will apply.
What about other Farm buildings?
Farm buildings used in the business will qualify for APR, but where they are let out they will not be considered agricultural property.
Has the “Farmer” case helped?
Yes, this tax case is extremely helpful. It is about Mr Farmer, who was indeed a farmer in partnership with his son. They had let out a number of cottages and farm buildings and these assets were shown on the farm balance sheet. All rents were paid into the farm account and shown on the profit and loss statement and all properties were managed by the farm.
When Mr Farmer died, his executors accepted that the let buildings were not agricultural property, but claimed BPR on the basis that the operation of these properties was part of a single business enterprise. The executors won this argument and BPR was granted on the let properties.
However, we do not think this case should be relied upon as general guidance, but certainly can be referred to in specific relevant cases.
Is land subject to IHT?
Where farmland is farmed in hand, or vacant possession can be gained within 24 months, or it is let on an FBT and has been owned for seven years, then 100% relief will apply to the agricultural value. Where the land is worth more than agricultural value – perhaps because of hope value for development – then the excess over agricultural value will be considered eligible for BPR where the conditions for BPR are met.
Where land is let on an AHA (1986) tenancy, then normally only 50% relief will apply.
What relief is available for “Entitlement” to the Single Farm Payment?
The new Entitlement is an asset separate to the land to which it applies. BPR is considered applicable to this separate asset, but only after the asset has been in existence for two years.
How should we make best use of the Partnership capital accounts?
A partner’s capital account represents a share of the assets and growing crops etc used in the partnership. Normally BPR will apply to the capital account. However, watch out for any clause in the partnership agreement saying that a continuing partner will purchase a deceased partner’s share, as BPR will then not apply. It is important that partnership agreements give the continuing partners an option to purchase rather than an obligation.
What relief is available if I farm via a Limited company?
Where shares are owned in a qualifying company (normally a trading company), then 100% BPR will apply.
Farmers should remember that diversification may cause a significant part of the company’s business becomes that of investment – for example, letting of buildings – in this situation the BPR on the shares could be lost.
How do borrowings interact with IHT?
The value of an asset for Inheritance Tax purposes is its market value less any associated borrowings. If a farm needs borrowings, no IHT saving is made if the security for these borrowings are assets which attract IHT reliefs. Therefore, it is advisable to secure farm borrowings against assets which do not qualify for IHT reliefs, e.g. let cottages.
Is IHT due on Pensions and life policies?
When pension benefits or life insurance benefits are paid into a deceased persons estate the receipt is subject to IHT. This can be avoided by simply writing the policies in trust so that the proceeds are paid to nominated beneficiaries.
How are assets held in trust taxed?
This is a hugely complex area but basically, if the deceased had an absolute interest in any assets held in trust, such as a life interest, then those assets are added to the deceased’s own personal estate. If the assets are held in a discretionary trust, then the assets are not aggregated with the deceased’s estate.
What is the pre-owned assets charge?
It is fairly common for farmers to transfer the ownership of farming assets to the next generation during their own lifetime.
However, as from April 2005 a new tax has been introduced.
Where an asset is gifted and the donor continues to enjoy some benefit from that asset, then an income tax benefit in kind charge will arise. Careful planning is needed to ensure that a charge does not arise and that there is no “reservation of benefit” by the donor. Otherwise, there may either be an Income Tax charge or the asset will be aggregated with the donor’s estate, or even worse – both!
Professional advice should be taken before acting on information contained in this article.
If you would like further information on any of our farming services please contact:
Jonathan Crowther FCA or Sophie Howard ACA