Tax planning to protect farming families' wealth
The tax man received nearly £4.7bn in 2015/16 in inheritance tax receipts, which was up from £3.8bn recorded in 2014/15.
This highlights the importance of considering tax planning options to protect your family’s wealth for the future, especially given the increase in the value of land in recent years.
Agricultural Property Relief and Business Property Relief can be a valuable inheritance tax relief for farming families, but to qualify for this farmers need to ensure that their affairs are structured appropriately.
Firstly, APR. For inheritance tax purposes agricultural property is classed as farmland or farm buildings that are located in the UK, The Channel Islands, Isle of Man or in an European Economic Area state.
APR reduces the value of agricultural property for inheritance tax purposes when it is gifted during lifetime or in the death estate. It is applied to the agricultural value of the land/buildings and is available at rates of 50 per cent and 100 per cent. Prior to the gift, the donor must have owned the land for two years, or seven years if the land is tenanted.
If all the following conditions apply, then the land and/or buildings will qualify for a rate of 50 per cent (unless transitional relief applies.): 1 The land is tenanted; and 2 Let on a pre-September 1, 1995 lease; and 3 The lease has more than two years to run at the date of transfer.
If any of the above conditions do not apply, 100 per cent of the agricultural value of the property will qualify for APR.
APR is available on the agricultural value of farmhouses if they are of a character-appropriate and are used for the purposes of agriculture. While HMRC does not provide strict guidance on this, they can apply the “elephant test”, whereby an elephant might not be easy to describe, but you would know what one is when you see it!
Secondly, Business Property Relief. BPR works in a similar way to APR, whereby it can reduce the value of property in the death estate or a lifetime transfer of qualifying business property to nil. HMRC has a “wholly or mainly” test to establish if the property is qualifying, which usually means it will look at the activities, assets and sources of income of the business, and if the farming and trading element represents more than 50 per cent, then the property should qualify for BPR.
Some larger farms have introduced assets into their farming businesses, which previously might not have qualified for any inheritance tax reliefs. While HMRC could challenge a claim for BPR, there is a stronger argument if the assets are owned within a farm trading business structure.
The devil is in the detail! In order to obtain these reliefs and to enable succession plans, wills, partnership agreements and powers of attorney all need to be kept up to date, to ensure no conflicting issues arise and that they reflect accurately the wishes of all parties involved.
Elizabeth Read is a member of Whittingham Riddell Chartered Accountants' specialist Rural Services team.
