Business Clinic: Where do we stand on IHT with let farm?

Whether it’s a legal, tax, finance or management question, Farmers Weekly’s expert panel can help.

Here Kate Bell, a partner in accountant Albert Goodman’s farms and estates team, sets out the inheritance tax issues involving a let farm and a small owner-occupied farming enterprise, which is farmed in partnership.  

See also: Business Clinic: advice on farming company profit forecasting

Q: How would I fare personally with regard to inheritance tax (IHT), having let 140 acres of my 150-acre livestock farm since 2007 on an FBT, currently to the third tenant.

The farm has a large, thatched, Grade II listed five-bedroom house and all modern buildings. There is also a three-bedroom self-contained annexe, let separately on an assured shorthold tenancy (AST).

I kept back about 10 acres and actively keep a few cattle in a field adjacent to our modern four-bedroom house, which overlooks the farm buildings and farmhouse. I have an active farming partnership with my wife.

The estimated value of the farm is £2.5m and there could be added value, for example a potential building site or two as the land borders a village.

We also own a four-bedroom property in a nearby town which we rent out and we have substantial savings in various interest-earning accounts. 

Can you suggest the main factors to lessen IHT and any other impacts on us. As the farm has been let on an FBT, will I be able to claim the full tax relief on the farm and farmhouse? 

A: Agricultural property relief (APR) can be available on farmhouses occupied by the working farmer where the property is of a character appropriate to the farming activity.

HMRC will assess the house in relation to the land farmed in-hand – in other words, the modern farmhouse with 10 acres, rather than the total 150 acres owned.

House character test

Given the relatively small acreage retained, the property could be considered excessive for the level of farming, in which case APR may be denied or restricted to its agricultural value.

This test would also be applicable to the Grade II listed farmhouse which, if occupied by the working farmer and let with the 140 acres and farm buildings, may qualify if it is deemed character-appropriate.

Unfortunately, it is hard to say without seeing the properties and level of farming activity.

You should also note that, depending on the ownership of assets and the terms of your wills, you may not qualify for the additional £175,000 each residence nil rate band if your estate/the estate of the second spouse exceeds £2m.

However, with appropriate structuring and ownership between spouses, it may be possible to preserve some or all this relief, which could save up to £140,000 of IHT.

The 10 acres should qualify for APR on their agricultural value.

If these assets are partnership property and the partnership is mainly trading, they should also qualify for business property relief (BPR) at 100% of open market value.

If the annexe is used within your business (income used by the business), it may also qualify for BPR under the Balfour principles, provided the overall business is mainly trading when considering turnover, profits, capital employed, time spent and the overall nature of the business.

BPR could be 100% or 50% depending on whether it is a partnership asset.

Importance of business status

BPR is also the relief required to cover any live or deadstock, plant and machinery, and other trading assets within the business such as investments/cash needed for future business use, and so the “mainly trading” status is key to the IHT planning of the business.

If the partnership were deemed on balance to be a property investment partnership (as opposed to a trading partnership) BPR would be lost altogether, bringing with it other tax implications.  

As such, if the annexe is used within the business but risks tipping the balance of the whole away from mainly trading, consideration should perhaps be given to removing this rental income from the partnership.

If the annexe is completely separate to the business it will not qualify for any relief and, therefore, along with cash and investment balances, will be subject to IHT at 40% after using your nil rate bands (£325,000 each) either on death or by lifetime gifts within the previous seven years (or where a gift with reservation of benefit applies).

APR on let farm

The 140 acres and farm buildings let under FBT since 2007 (and potentially the farmhouse) should qualify for 100% APR, but not BPR. Relief will therefore be limited to agricultural value only, meaning any development or “hope” value would remain exposed to IHT at 40%.

As such, if the potential building sites are within this 140 acres, relief on the hope value will not be available.

Finally, IHT on cash and investments is payable within six months of death. Any IHT due on non-relievable property (such as the AST let property) can be paid by instalments over 10 years, although interest will apply.

IHT on APR/BPR qualifying property that exceeds the relevant allowances can also be paid by instalments over 10 years, generally interest-free.

When considering your IHT position it is essential to look at your situation as a whole including asset ownership, whether assets are part of a partnership, the partnership’s trading status and, most importantly, whether the farmhouses are of a character appropriate.

There are no guarantees regarding APR on farmhouses, as each case is judged on its own merit by HMRC.

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