Business Clinic: Inheritance tax implications of letting out farm land

Whether you have a legal, tax, insurance, management or land issue, Farmers Weekly’s Business Clinic experts can help.

Here, Peter Griffiths, tax director at Hazlewoods, advises on the tax considerations of letting land to a neighbour.

Q. I am in a farming partnership with my wife, son and daughter. The partners own 160ha of land that is not included in the partnership balance sheet and they live in three different properties on the farm.

We are about to concentrate on the pig-rearing part of the business and rent out most of the land on a farm business tenancy. I have been told this will potentially affect our inheritance tax position. Is this correct?

A. This is correct.  Any assets owned by the partners and used in the business are potentially eligible for agricultural property relief (APR) and business property relief (BPR) for inheritance tax (IHT). 

See also: Business Clinic – tax implications of changing to company structure

If the land to be rented out has been owned for at least seven years, 100% APR will still be available if it is occupied by another party for agricultural purposes.  

However, APR is only available up to the agricultural value of the land. Therefore, if there is development potential, this part of the value will not be covered by APR.

BPR covers the full market value, but is only available if the land is farmed in-hand or under a contract farming arrangement, share farming arrangement or grazing licence.

However, as the property is not included in the partnership balance sheet, BPR would only be available at a rate of 50%. To qualify for 100% relief, property has to be included in the partnership balance sheet.

The land and buildings occupied by the pig-rearing enterprise will be eligible for BPR from IHT, but only at a rate of 50%.

To ensure BPR is available on the pig-rearing unit, the rent received from the land should not be included in the partnership accounts.

Otherwise, depending on the amounts involved, the partnership may not qualify as a trading business for BPR purposes. 

As the pig rearing is the only farming activity carried out by the partnership, it is likely that the nature of the activity will mean APR is no longer available, including on the three houses occupied by the partners. 

This is because HM Revenue & Customs will argue that the occupation of the pig-rearing unit is not “ancillary to the surrounding agricultural land”, as the surrounding land is not occupied by the partnership.

Each individual is eligible for an IHT nil-rate band which is currently £325,000.  For a married couple it is likely that their wills will be structured such that two nil-rate bands are available on the death of the surviving spouse. 

Therefore, depending on the values of the properties, the loss of APR may not be an issue, if there are not significant other assets that do not qualify for other IHT relief. 

In addition, if an individual has an estate worth less than £2m before any reliefs, they are eligible for an additional IHT relief in respect of the main residence. 

To qualify, the property must be inherited by one or more direct descendants, such as children or grandchildren.

The relief is currently worth £125,000, but will rise to £175,000 after 5 April 2020. Therefore, for a married couple the relief could be worth an additional £350,000, meaning that a main residence worth £1m may not suffer IHT.

Alternatively, APR should be available on the three farmhouses if the farmland was again farmed in-hand, under a contract farming arrangement, share farming arrangement or grazing licence. This would mean the surrounding farmland is occupied by the partnership.

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