There is a belief in the agricultural community that there is no inheritance tax (IHT) to pay on all gifts of agricultural property. This is because agricultural property attracts agricultural property relief (APR).
However, there are many situations the Revenue has successfully challenged recently, as it closely scrutinises claims for APR, an essential relief for the continuance of farm businesses.
The rules are complicated and each situation needs to be looked at individually. There are two particular areas where some or all of the relief is regularly being lost inadvertently:
1 The Farmhouse
Agricultural property is defined as ‘agricultural land including buildings and the farmhouse’. To qualify for relief the property must have been occupied by the person making the gift for two years prior to death or owned for a period of seven years and throughout that period used for the purposes of agriculture.
The main points to remember when attempting to secure APR for the farmhouse are:
i) The farmhouse has to be of a character appropriate to the property, appropriate that is to the property being given not the entire extent of what is being farmed. A problem occurs when a farmer owns a large farm with a house in the middle of it and on retirement gives the majority of the land away retaining a small proportion of the land and the farmhouse. This usually means the farmhouse is no longer of a character suitable to the land retained. The Revenue are making these arguments to curb ‘non-farmers’ who buy so called ‘lifestyle farms’, who often contract out the farming activities, or farms where there is not a full-time farmer residing at the farmhouse.
ii) The farmhouse must be occupied for the purposes of agriculture, and preferably the farmer of the land. The classic mistake on retirement is to let the land on a Farm Business Tenancy (usually with a written contracting arrangement in place) but retain the farmhouse. This loses APR on the farmhouse. This is a worrying situation as on retirement many farmers either let their land or enter into contracting arrangements to save work. As far as the relief is concerned, the contracting arrangement is the better of the two but the farmer must continue being actively involved in the farming business. Ploughing the land would be helpful as would retaining ownership of the crop and doing the selling. Annual accounts should continue to be filed showing the gross income as sales.
iii) APR is only given on the agricultural property value. In other words the value on the assumption the property can only be used for agriculture. For practical purposes that means the farmhouse would be valued on the basis of a theoretical agricultural habitation clause as is typically imposed by planners on new farmhouses and this will mean that anywhere between 15% and 30% of the value does not attract relief. The more integral the farmhouse is with the yard and other farm buildings, including such things as common access, the lower the discount will be.
Consideration might need to be given to make sure that as and when the farmer retires he also leaves the farmhouse.
2 Ownership of the land
Most family farms have ownership of the land spread between the family, and some are even owned by the farming company. It is easy to fall foul of the rules and end up with only 50% relief where land is owned by one person but farmed by another entity such as the company. If the person making the gift does not have control of the company when the gift is made (including on death) APR will be reduced to 50%. This can make a very significant difference to the tax payable. There can also be problems if the farmer leaves a spouse who lives in the house but is not part of the business.
Tax should not however be the only consideration. The farm needs to be operated commercially and farmers and their families’ particular circumstances will be relevant.
Rick Bunch is based in our Alderley Edge office and specialises in creating bespoke and tax efficient inheritance and wealth preservation plans for individual family and business circumstances. Rick can be contacted at firstname.lastname@example.org or on 01625 585404.