The farming community is often concerned about passing down the family farm to the next generation and what this means in the often-complex world of inheritance tax.
The key points that many miss are that farms, or parts of farms, can benefit from the very valuable inheritance tax relief (IHT), which is known as Agricultural Property Relief (APR). In most cases, and under present UK tax legislation, this can mean that the farm which is eligible benefits from 100% relief from IHT.
However, there are very strict criteria to be met in order for the various components of the farm to qualify for APR. Even where awarded, the relief is restricted to the strict agricultural value and not available for any premium. For example, where the farm is very attractive and in a high-demand area, or there is potential for the land to be developed.
The more important relief can be Business Property Relief (BPR). This is particularly true where a farm has diversified to include other activities. This can include the letting of cottages, providing bed and breakfast holiday lets, fields sports activities, applications for planning permission, letting fields for grazing, or on farm tenancies.
Where a farm is run with some or all of the other activities as one business, then HMRC will analyse whether or not it is wholly or mainly trading.
The key tax point is that the business will only qualify for BPR if there is more trading (i.e. qualifying farming activity) than investment type activities (letting of cottages and most holiday lets). There is guidance from the cases of Balfour[1] and Farmer[2], where the tax payer has achieved BPR on let cottages. However, it is essential that farming families seek specialist advice to try and get the balance right. The scales must not be tipped too far with too many investment type activities.
There are many prudent measures which can be taken to get the farm business structure right. This will involve, initially, reviewing the partnership agreement, the land ownership, occupation and use, the farming accounts and wills. It is then vital to take the correct steps to maximise the IHT reliefs.
We are currently experiencing difficult times as we live through the Covid-19 pandemic. It has been a period for many of us to pause and reflect and this has meant many in the farming community have been looking to ensure that their legal affairs are in order, so that they can be dealt with as straightforwardly as possible when they pass away, and without being overburdened by inheritance tax.
Sally Smith advises on farming estates, with a particular expertise in inheritance tax and succession planning. For further advice, readers can contact Sally at our Ludlow office through 01584 873156, or via email at sally.smith@mfgsolicitors.com
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