Make sure you don't fall foul of inheritance tax trap

Preparing your finances so your home is secure should a family member die is a difficult job for anyone, but for farming families it's even more important – and more complicated.

Inheritance tax can cause major financial headaches, and in the worst case scenario, force people to sell property that has been in the family for generations.

It can be heartbreaking stuff, but with the right planning you can avoid sizeable tax bills and, in some cases, avoid paying anything at all.

When a property owner or landowner dies, inheritance tax is not charged on the first £325,000 of the estate value, but it then jumps to 40 per cent on the rest – including any cash holdings which they may have accrued.

Now you can't assume that your farm qualifies for full inheritance tax relief just because your will is up to date.

But there are certain reliefs which are able to reduce the charge, including Agricultural Property Relief.

APR reduces the value of agricultural property charged to inheritance tax by 100 per cent in the case of a farm that you "occupy for the purposes of agriculture" yourself.

As always, there are several complicated qualifications that you have to meet and must be able to prove to the tax man to gain full APR.

The law says the farmhouse must be "of a character appropriate" to the land being farmed to qualify for APR, so for instance a Georgian manor house on 10 acres of cabbages is not going to work.

This is where the "elephant test" comes in, because you need to convince the HMRC that your farmhouse is appropriate for the farm.

So you need to consider how the size and value of the house relates to the size, value, and profitability of the land being farmed; and the layout of the house and the farm outbuildings – for instance if the nearby outbuildings are stables for your horses rather than farming, and all the machinery is kept half a mile away in a modern barn, this will go against you.

And finally, would an "educated rural layman" look at the property and agree that it's a farmhouse, or would he say "what a magnificent country house"?

This is what's known in the trade as the elephant test – hard to describe, but you know one when you see one.

It's worth speaking to your land agent who can help by finding out exactly what your farmhouse and estate is worth and then liaising with your accountants to minimise any future tax liability.

* Paul Madeley, Madeleys Chartered Surveyors, Much Wenlock