Reduce burden on relatives with careful inheritance tax planning

Tax is a minefield for farmers at the best of times, but with land and property at stake it’s especially important to get good advice when deciding on what will happen to your assets when you die.

Currently, individuals can bequeath up to £325,000 tax-free (£650,000 between husband and wife), with any value of assets left to a spouse or charity also free of inheritance tax (IHT). Above that, beneficiaries must pay up to 40% tax, warns Christine Green, partner at solicitor Veale Wasbrough Vizards.

Although farm land and property benefit from 100% Agricultural Property Relief (APR), HMRC is contesting a number of cases, so estates must be carefully structured.

“It’s very important that you take specialist advice, because HMRC isn’t known for its benevolence – if there’s any doubt, APR won’t apply,” says Ms Green.

To quality for APR, land or property must have been owned for seven years before death, or owned and lived in for the two years before death. However, where a husband owns the property and leaves it to his wife, she does not have to live in it for a further two years to qualify, says Ms Green. “It is physical occupation that counts, and you will need good evidence of that.”

Let land or property can also be eligible, providing the lease is terminable within 12 months. Woodlands, farm buildings and equine studs all qualify, but pheasant buildings and stabling or grazing for leisure purposes do not. “If you have got some land let out, check what it is being used for.”

It is becoming increasingly difficult to claim APR on farmhouses, she adds. “There are three questions – is it a farmhouse, is it occupied for agricultural purposes and is it of a character appropriate to the land?”

In a case called Antrobus, judges ruled that the purpose of the occupation must be to run the farm. “It is an all-or-nothing relief,” says Ms Green. “You can’t claim for part of the house. Hold your meetings there, keep minutes, have the farm office in the house, make sure the occupant has a significant role in the farm management.”

Selling or gifting some of the land could deprive the house of its farming character and large mansions may not be deemed appropriate to a small farm.

“Is it a house with land, or is it a farmhouse? Farm profitability should not matter, although HMRC appears keen to investigate the whole business,” she adds.

Many farmers choose to make over assets at least seven years prior to death, to avoid paying IHT.

But this policy does represent some dangers to consider, says Ms Green. “Capital Gains Tax (CGT) may be triggered, and if the beneficiary sells that asset before the seven years are up, HMRC can charge the IHT that would have been payable.”

An alternative is to transfer assets to a discretionary trust, so that they qualify for IHT relief – the older generation can retain control of assets as trustees and CGT can be mitigated using holdover relief.

“You should also look at what loans and mortgages are secured against – they will reduce the value of your estate, so make sure they’re secured against non-farming assets to maximise the relief available.”

IHT planning is only effective if the benefactor makes a will. This allows executors and business successors to be chosen, specific bequests to be made, and the appointment of legal guardians for children. Discretionary trusts can be used to cater for those other than immediate beneficiaries.

“For example, a husband could leave the farm in a discretionary trust to his wife and children,” says Ms Green. “He leaves his investments to his wife, tax-free, who then uses them to buy the farm out of the trust, leaving cash in its place.

“As long as the wife survives two years, she can then leave the farm to the children tax free, as well as the cash in the trust. It’s also possible to take out level term assurance to cover the two-year period in case she doesn’t survive that long.”

A life insurance policy in trust for one or more children is another way to pass on the farm to one child and cash to another.

IHT PLANNING CHECKLIST

• To qualify for APR, land or property must have been owned for seven years before death, or owned and lived in for the two years before death
• Let land or property can also be eligible, providing the lease is terminable within 12 months
• Use of farmhouse, land and other property is important in establishing eligibility for IHT relief
• Gift carefully – consider CGT implications
• Secure borrowing against non-farming assets to maximise relief
• Make wills to include tax advice, update regularly
• Use life cover to protect beneficiaries and estate, also to fund payments to non-farming family members