“Death and taxes” are often cited as the only two certainties in life, and both of these topics have been brought into sharp focus by the recent pandemic.
Many people are suddenly aware of their own mortality, and as a result, many people have recently reviewed and updated their Wills, whilst others have completed a Will for the first time in order to ensure orderly succession. And for those yet to undertake this exercise, there is no time like the present!
For the farming community, succession planning in recent times has revolved more around the younger generation, who have an increasing interest to move away from traditional methods, towards sustainable and environmentally friendly practices. There is also more interest in diversifying into different business areas, with less concern on the tax implications for Inheritance Tax (IHT).
Of course, most farmers and their families are well aware that current relief from IHT is available, in most cases at 100%, for transfers of value of agricultural (and business) property. However, there are qualifying conditions to be satisfied, and so it is essential that the potential tax consequences are considered for any changes or diversification of the business. The basics of the relief are considered below.
IHT – Agricultural Property Relief (APR)
The agricultural property must be occupied by the transferor for the purposes of agriculture:
- Throughout the period of two years ending with the transfer; or
- Owned by the transferor for seven years and occupied throughout that period by them or another person for the purposes of agriculture.
In addition, in the event of death of the transferor, the agricultural property must be specifically gifted to a beneficiary. A legacy out of the property is not a specific gift of agricultural property, so it does not qualify.
Most farming business is undertaken by individuals or partnerships, but the shares in a farming company controlled by the transferor also qualify for relief.
Agricultural property is defined as “agricultural land or pasture and includes woodlands and any building used in connection with the intensive rearing of livestock (or fish) if the woodlands or building is occupied with agricultural land or pasture and the occupation is ancillary to that of the agricultural land or pasture.
It also includes such cottages, farm buildings and farmhouses, together with the land occupied with them, as are of a character appropriate to the property. Agricultural land which is taken out of production can still qualify for APR because the legislation at S117 Inheritance Taxes Acts 1984 (S117 IHTA 1984) does not require the land to be in production, either continuously or at a specific time (though there must be an intention or expectation that the land will be back in production at some time in the future).”
The relief from IHT applies to the agricultural value of the property, on the assumption it is prohibited from use as anything other than agricultural property. As such development value cannot benefit from the relief, there may potentially be a claim for Business Property Relief (BPR) if farmed in hand.
Land used outside basic agricultural use would not qualify for the relief.
For example, growing reeds for thatching is not considered agricultural use, because the reeds are not themselves a “crop”. Similarly, keeping game birds or fish for sport are not considered to be agricultural use of land. HMRC also do not consider the Basic Payments Scheme (formerly the Single Payment Scheme) to qualify as APR. Instead, it is a separate asset which should be borne in mind when creating one’s Will. Nevertheless, in many circumstances it may qualify for BPR.
With sustainability in mind, APR is now extended to farmland and buildings dedicated to wildlife habitats meeting the ownership criteria above. These “Habitat Schemes” protect wildlife by taking farmland out of use for 20 years, making the occupation test difficult to satisfy. However, the legislation specifically allows relief for schemes within the Habitat Regulations 1994.
Therefore, for the younger generation wanting to diversify, a move away from agricultural use of the land should be carefully considered. Perhaps, using corporate entities to restructure the “farming” business can separate the different uses of the land and preserve relief, at least in part. Also, we should not forget the availability of BPR instead – but that’s a topic for another time.