Inheritance Tax for Farmers
When it comes to handing the farm on to the next generation, people often look for advice on whether there are ways to save on paying the Inheritance Tax (IHT) which becomes chargeable upon death.
Clients who hold farming assets face this problem because their major capital asset is often the family farm and so they find themselves in a situation where they are asset-rich and cash-poor. This is where Agricultural Property Relief (APR) can help, so that land and buildings which are occupied for the purposes of agriculture can be passed on to other people, in most circumstances, tax-free.
However, as with everything, there are catches and specific conditions which need to be met in order for the relief to be claimed and we find that HMRC are now looking at APR cases with greater scrutiny than they ever have done before. The rules state that APR can be claimed on land and buildings which are occupied “for the purposes of agriculture” and either:
– owner-occupied for a minimum of two years prior to death;
– owned for a minimum of seven years and let out to a third party, whether by tenancy or other agreement prior to death.
There are further specific rules relating to the farm’s farmhouse which need to be considered when advising on APR. For example, the role of the farmhouse must be functional and ancillary to that of the agricultural land. It therefore follows that it must not dominate that land. It is further important to note that where a farmer has retired from farming but still lives in the farmhouse, while letting the farmland to a third party under a tenancy or grazing agreement, it is highly unlikely that the farmhouse will qualify for APR as it is not deemed occupied for the purposes of agriculture. As the farmhouse can be of significant value, this could potentially expose a client’s estate to costly IHT payments.
While there is a new additional tax break on residential property (the Residence Nil-Rate Band – outside the scope of this article but we are happy to provide advice on this aspect too), the overall question of succession to the farm must be considered at the earliest opportunity to ensure the most tax-efficient means of succession. Failure to do so may jeopardise the availability of APR and lead to a greater tax burden and difficulties for the next generation. It is imperative that legal/tax advice is sought to evaluate your specific circumstances.
Ann-Marie Matthews is a solicitor in the private client team at Barker Gotelee, Solicitors in Suffolk.
This article previously appeared in the East Anglian Daily Times in September 2017.