Estate planning for farmers can be complicated. Farming families are faced with trying to look after each member of the family at the same time as passing farms down to the next generation in a tax efficient way.
Agricultural Property Relief exists to allow farms to be inherited by the children without the need to break them up and sell parts off to pay the inheritance tax bill. Business Property Relief (“BPR”) and Agricultural Property Relief (“APR”) are the two main reliefs from Inheritance Tax and agricultural property can often benefit from both reliefs. Both, BPR and APR are invaluable for farming families as they result in a substantial tax saving and enable farms to be passed on down the generations.
The agricultural assets which can potentially benefit from APR are land or pasture, woodland occupied with agricultural land or pasture, buildings used for intensive rearing of livestock or fish, farm cottages and buildings, and farmhouses.
APR is only available on the agricultural value of the land which is not always the same as the market value. BPR is then often used on any value over the agricultural value if possible. I do not intend to go into how this works in this particular article but essentially the two reliefs are often used together.
When it comes to the farmhouse, BPR will not be available (it will not usually qualify as a business asset) and therefore APR becomes essential. Obtaining APR on the Farmhouse however, is not always straight forward. You have to prove that the property is integral to the farm itself i.e. it is used within the farming trade and farming activities are run from the farmhouse.
There have been many cases on this point which come up with a variety of tests to try and establish whether APR should be applied. HMRC will look at all of the circumstances including: Did the deceased owner work the farm? Is the house an appropriate size and layout for the farm land and other farm buildings? Is it proportionate to the farming activities conducted on the land? How long has the house been associated with the land?
If you do secure APR for the farmhouse, it is still only on the agricultural value. It is not unusual for the market value to be much higher than the agricultural value, for example when the farmhouse is a particularly attractive property and situated in a desirable residential area. However, the government’s introduction of a Main Residence Nil Rate Band for IHT may assist farming families when it comes to IHT relief on the farm house.
Many of you will have now heard about the new Main Residence Nil Rate Band for Inheritance Tax in the media. This is due to be implemented in April 2017 and it will be introduced in stages, i.e. £100,000 in the tax year 2017/18, then rising by £25,000 each year, reaching £175,000 in the tax year 2020/21. The property must be left to direct descendants (children or grandchildren) in order for the relief to apply. The relief will reduce once an estate reaches £2 million, disappearing completely for estates over £2.35 million.
This new nil rate band means that married couples will have a threshold of £1million available against their joint estates before any tax is payable. This is going to be an advantage to many families from a tax saving point of view, but it also means that families that wish to retain the family home are more likely to be able to do so.
Farming families are amongst those who are more likely to want to keep the family farmhouse, particularly if children are planning to continue running the farm. If they are unable to secure APR of the property then they now have a new threshold to use which will result in a significant tax saving. If they are able to claim APR on some of the value then they may be able to use the new residence nil rate band to cover the surplus.
Every case is different and it is important that families seek professional advice at an early stage to start the estate and succession planning process.