InsightsInsight - Agriculture and Rural, Tax Planning - POSTED: March 16 2020
Thinking of diversifying? Be wary of the Inheritance Tax implications
With milk and grain prices decreasing, the pressure for farmers to find another source of income and diversify has increased. Indeed, Government reports have indicated that 62% of UK farmers have had to diversify in recent years.
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In this article, we look at changes in the traditional farming operation, the associated loss of inheritance tax reliefs and the planning options available to modern farming families to save Inheritance Tax (IHT).
While diversification may lead to increased income, there is a risk of losing the agricultural property relief (APR) that may reduce an Inheritance Tax bill for farmland. For the purposes of IHT, HM Revenue & Customs (HMRC) tends to assess a farm in a piecemeal way (i.e. by looking at the different uses of the land and the way it’s occupied), and each farming operation is considered independently from the other. To qualify for APR the operation must be for an agricultural use. Without the availability of APR, farmers are left to rely on business property relief (BPR) to reduce their IHT liability. However, depending on the circumstances, this is not always available, because to qualify for BPR, the land must be used for trading rather than investment purposes.
One of the most common methods of diversification adopted is to use property for holiday letting. Holiday lets are a quick and easy way to make money from surplus property or areas of land which can be used for this purpose. However, holiday lets can be problematic when it comes to IHT reliefs. APR is not relevant here, and for the purposes of BPR, HMRC does not generally treat holiday lets as a business because ‘rents’ are deemed investment rather than trading.
Another common use of land is stables from which livery services are provided. HMRC does not consider the keeping of horses as an agricultural purpose unless the operation is a commercial stud farm. BPR may be available here if the owner of the land actively provides full livery services. If the farmer simply rents out the stables, then the operation is less likely to qualify for BPR. In addition, any land simply used to graze horses is unlikely to qualify for APR.
There are options available to cover the IHT bill for farmers who have diversified and no longer require additional income:
- Take out a life assurance policy to cover any IHT liability that might arise on your death. Any policy taken out should be written in trust so it is held outside your estate for IHT purposes. For the older farmer, the monthly premiums might be prohibitive.
- Give away some of your farm to the next generation either outright or by way of a trust. If a gift is given outright during your lifetime, there will be no immediate IHT to pay. However, you will need to survive seven years from the date of the gift to avoid the value of the land gifted forming part of your estate for IHT purposes. Any gift made may be subject to capital gains tax (CGT) on any gain in the value of the asset since it was originally acquired. The likely rate of CGT will be 20%.
- Give some of your farm away by putting it into a trust which then passes it on to the underlying beneficiaries. The advantage of this option is that any inherent gain can be transferred to the beneficiaries thereby avoiding an immediate charge to CGT. Your beneficiaries would have to pay CGT on any future disposal of the land. Any gift into a trust over and above a person’s IHT allowance (if not eligible for APR or BPR) will attract an immediate IHT liability of 20% (unless reliefs apply) and a further 20% liability if you fail to survive the date of transfer by seven years.
There are also other options available depending on your situation. With careful planning, IHT can still be avoided where relief has been lost because of farm diversification. As to which option is best depends on the values of the land involved and your individual circumstances.
This article was first published in the February 2020 edition of South East Farmer.
This content is correct at time of publication
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