INHERITANCE tax may appear relatively benign as far as agriculture is concerned, but it is easy to be lured into a false sense of security, warns Mr Hill.
"There is plenty of leeway as far as trading assets are concerned. But non-trading assets are a very different matter. Only the threshold value, likely to be set at about £250,000 in 2002, is exempt. The rest is taxed at 40%. You can easily pay a lifetime of farm profits on death if you are not careful."
Many farmers still secure most of their borrowing on trading assets like land. But getting their lender to transfer the charge to non-business assets, such as property, or stocks and shares, could save a small fortune.
For example, farmer A may own £1m of land and £750,000 of non-business property (see table). He has secured £500,000 of borrowings against his land.
Farmer B is in exactly the same position, but has secured his borrowing against his non-business property.
Although both businesses have a net equity of £1.25m, they are treated very differently when it comes to paying IHT.
Land qualifies for 100% agricultural property relief (APR). So, neither estate will have to pay IHT on this portion. But non-business assets do not qualify for this relief. As only the first £250,000 is IHT-exempt, farmer A has a taxable estate of £500,000. His successors will have to pay the taxman £200,000. But farmer Bs successors will pay nothing, since his £500,000 borrowing is charged on his non-business assets.
"By simply re-arranging the security, farmer A could save his family £200,000, equivalent to many years of retained profits for the next generation."
Although this example is simplistic, there are still many farmers whose borrowing is secured on the APR assets. "This needs to be reviewed," says Mr Hill. *
Land Non Total
Asset value 1m 0.75m 1.75m
Borrowing 0.5m –
Net equity 0.5m 0.75m 1.25m
IHT liability – 0.5m –
IHT due 0.2m
Value 1m 0.75m 1.75m
Borrowing – 0.5m
Net equity 1m 0.25m 1.25m
IHT liability – – –