In an ideal world the family farm would be passed from one generation to the next with no tax implications. However this is not typically the case, and if not managed appropriately can result in large tax bills and ultimately the sale of land.
What is Inheritance tax (IHT)?
It is the tax on the property, money and possessions of someone who has died. There are certain thresholds on the value of estates. However the majority of the value of farms exceed these thresholds. In November 2022 the standard rate of inheritance tax is 40% and who knows where this could go in the future given the UK government’s need to find additional income.
In this post we will explain what inheritance tax is, when it is payable and how it can be managed. The reason why we are providing this information is that farmhouses, buildings and land are in most circumstances a famers biggest asset and without them, can make farming for future generations very difficult and this something we want to avoid. We wish to see farms being passed on to future generations to allow them to farm in a profitable and sustainable manner, having to sell land to pay IHT is in no one’s interest.
You’ll be glad to hear that concerning agricultural property there are reliefs available depending on the structure and management of the land prior to and at the date of death. However this is not something that can be arranged quickly, evidence would have to be provided to demonstrate eligibility for the reliefs.
Agricultural property relief (APR)
Agricultural property that qualifies for APR can be passed free of inheritance tax during your lifetime or as part of your will. To qualify for APR the land or pasture must be used to grow crops or animals intensively. Farmhouses, farm cottages and buildings are also eligible for APR, however farming equipment, harvested crops and livestock do not qualify for APR.
Certain requirements must be met; land cannot simply be acquired with a view to claiming APR immediately. You must be able to demonstrate who the owner occupier of the property is; if occupied by the owner, a spouse or a company controlled by them, APR would be available providing it has been owned and occupied for two years immediately before its transfer. If the property is occupied by a third-party i.e. let out, it must have been owned for seven years immediately before it’s transfer.
There is a significant amount of case law determining what is farmhouse or cottage. In simple terms a farmhouse or cottage must be occupied by someone employed on the farm, a retired farmer or the spouse or civil partner of a deceased farm employee. Over time farmhouses have become less traditional and has become more of an issue. The difference between their ‘market value’ and ‘agricultural value’. In most circumstances the agricultural value is 70% of the market value with regarding the farmhouses and cottages. APR is only claimable on the agricultural value, not the market value.
There are different rates of APR; 100% and 50%. If the property is owner occupied, or the land used by someone else on a short-term grazing licence or let on a Farm Business Tenancy (or an Agricultural Holding Act (AHA 1986) tenancy that has been succeeded after 1995) 100% APR is available. If the property is let on an AHA 1986 tenancy prior to 1995 and no succession has taken place, then only 50% APR is available.
It is quite common for families to wish to continue to stay in occupation of farmhouses and land especially given the above rates of relief that are available for those that continue to farm. However, if a farm is let out and a farmer or retired farmer is not residing in the farmhouse this could result in a 40% inheritance tax bill on the value of the farmhouse. In this circumstance we would consider the farmer entering into a contract farming agreement with a third party to allow the owner to continue occupying the farmhouse and land and then sell the grass or crops in an arm’s length transaction. Thus they would still be farming and trading to try and reap the benefits of APR.
In a contract farming agreement it is essential that the farmer continues to trade, to claim subsidies, to pay for all inputs, contracting costs, sprays and fertilisers etc. The farmer then sells the crops at market value. If this process is not adhered to and if in effect a rent is paid, it could be deemed that this is a tenancy and only the land not the farmhouse would be eligible for APR.
Business Property Relief (BPR)
When farm holdings form part of a larger estate which includes a mixed portfolio of properties, there is the opportunity to look at a further relief being BPR which is a completely separate inheritance tax relief available. I would recommend taking accountancy advice on this matter.
There are opportunities to rent land on long term agreements with housing developers to enable them to offset the potential biodiversity loss from their developments, referred to as Biodiversity Net Gain. These types of agreements will be on Farm Business Tenancies (which is in most circumstances receive 100%), however if the land is not being farmed it may not actually meet the agricultural property definition. This will certainly require some carefully worded agreements to protect landowners renting land for this purpose.
If you are aiming to put in protocols to pass on agricultural property to the next generation or want to ensure that you can do everything possible to reduce inheritance tax issues we would be more than happy to discuss your requirements.
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