Farmers need to ensure that they stick strictly to the rules on inheritance tax relief as these are likely to come under increasing scrutiny by HMRC.

The National Audit Office is launching an investigation into the misuse of Agricultural Property Relief (APR), Business Property Relief (BPR) and other reliefs from Inheritance Tax (IHT), warns Catherine Desmond of accountant Saffery Champness.

“One certain consequence of this report is that there will be far greater scrutiny of applications for such reliefs and, if the rules are not met to the letter, then we can expect to see more rejections and possibly as a consequence more appeals,” said Mrs Desmond.

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The result of the investigation is likely to be a far more thorough evaluation of the working of reliefs, the closure of loopholes and tightening up of opportunities for misuse, she said.

There were several areas where farming and landowning businesses commonly slipped up:

  • Make sure farm buildings are used where possible – redundant ones will not get any relief. With the spotlight currently on a relaxation in planning rules for redundant buildings, HMRC will look more closely at the potential value of these as well. Entries on tax returns – for example, giving the occupation of the deceased on an IHT return as “retired farmer” will not be helpful as the relief requires them to have been farming when they died or made the gift
  • Make sure the right family member is in the main farmhouse (ie. one who is actively involved in the farming).
  • Look at land that might be in a different ownership to the trading activities – for example, there may be a family farming company or partnership that uses land owned by a family member who is not a part of the business.
  • Applications for a reduction in council tax because the farmhouse “is not occupied” – the farmhouse must be occupied for the purpose of farming to be eligible for relief
  • Be aware that APR is only available on agricultural value. If there are any areas of land with “hope value” attached, they would be better farmed in-hand than let so that business property relief can be claimed.
  • Ensure trading income is correctly reported on income tax and VAT returns – HMRC will have these to look back on and will pick up on inconsistencies
  • Ensure that grazing arrangements and contract farming agreements are correctly administered in practice as well as in writing if the landowner wants to be trading as a farmer rather than simply letting farmland
  • Ensure that where lifetime gifts of farmland occur (particularly with an elderly donor), the recipient continues for the required period of time. If they do not, there is a chance that relief will be lost if the donor dies within a short time after the gift.
  • Be aware that using land for a renewables project could well change its IHT profile and eligibility for reliefs
  • Ensure that large cash balances held within a farming business are there for a good reason (ie. investment in a future acquisition of farmland or a specific project) and this has been well documented, otherwise it may not get any relief on an untimely death
  • Conversion of farm buildings for non-agricultural uses might have an effect on the IHT position – this should be weighed against the commercial rationale for diversification
  • Letting land for horses to graze will mean that it does not qualify for IHT relief