With forethought and planning, it may be possible to use Agricultural Property Relief (APR) to protect certain farming assets from Inheritance Tax (IHT) and therefore pass the farming business down to the next generation with a reduced tax bill.
Alistair Millar, partner at Tallents in Southwell, looks at the key requirements when succession planning to maximise tax reliefs for farmers.
Protecting and maximising Agricultural Property Reliefs
APR is an important part of succession planning for farmers wishing to pass on the maximum amount of their assets intact to the next generation. However, there are certain requirements, which must be met in order to claim 100% relief from IHT.
APR is available on the value of agricultural property (agricultural land, pastures, farmhouses, farm cottages and farm buildings) only if it has been owned and occupied for the purposes of agriculture for a minimum period of two years before death.
If the property has been let for the purposes of agriculture, then it must have been owned for seven years before death.
Today, we are seeing more and more farming families entering into farm business tenancies (FBTs).
These allow the original farm to be split and let to the younger generation, often with the older farmer retaining the farmhouse and some agricultural land. But care must be taken to ensure that the ongoing farming operations will be IHT efficient.
It is important that all parties retain evidence (for example: Partnership Agreements, Contract Farming Agreements or Grazing Agreements) of the continuing day-to-day farming activities across all the agricultural properties, so that proof can be given to HMRC of their individual ‘character appropriate’ qualification for 100% APR.
‘Character Appropriate’ ruling and Agricultural Property Relief
This is because HMRC often try to deny APR on farmhouses under the ‘character appropriate’ ruling. They will take into account the size of the farmhouse in relation to the agricultural land and activities being conducted thereon, including how long the farmhouse and agricultural property have been associated together.
Farm Business Tenancies
Where FBTs have been used without specialist legal and tax planning advice, it may leave too little land or not enough documented ongoing agricultural activity to allow the farmhouse and associated land to pass the ‘character appropriate’ ruling. As such, they could become liable for full IHT at a later stage.
We do advise those involved in the farming industry to review their wills regularly to ensure that their farming and business assets can be redirected in a tax-efficient manner and take full advantage of all available reliefs.
If there are proposals to change the way the business is run to allow for succession planning, then we would urge you to check before implementing any changes as to whether this will have any impact upon the availability of APR and other associated reliefs.
You will only get the tax relief if you satisfy all the detailed conditions in the legislation. It is very easy for a genuine farming business to miss out on inheritance tax relief because a condition has not been satisfied.
Tallents can assist with APR queries and also advise on the availability of the associated relief known as Business Property Relief.