Advice on IHT reliefs for farmers with diversifications

Diversified businesses need to regularly review their position to ensure that valuable reliefs from inheritance tax (IHT) are not lost by default, warn advisers.

While qualifying farming assets may attract 100% relief through agricultural property relief (APR), many diversified businesses may need to claim business property relief (BPR), also at 100%, on other assets.

The balance between those types of assets is critical in maximising reliefs.

For businesses with a mixture of farming and other assets – for example, rented cottages and diversified enterprises such as workshops, offices and storage for rent – a claim may be made for BPR.

Almost 10 years ago, the Balfour case established the tests applied by the courts and now HMRC when assessing a diversified estate or farm’s claim for BPR.

See also: Legal, tax and management tips for a smooth harvest

The decision in this case essentially outlined that the relief would be available where a business was judged to be predominantly a trading rather than mainly an investment business.

“It is tempting to see the Balfour test as a get-out-of-jail-free card that will minimise exposure to IHT when the time inevitably comes,” says tax adviser Clive Beer of Savills.

No room for complacency

“But this view is complacent: Balfour compliance cannot be left to the last minute, and relies on the rigorous planning and rebalancing of an estate’s business model and diversified components.”

Several elements are examined when assessing whether a business is predominantly a trading concern.

These include turnover, profitability, capital values and the time spent on various activities.

“The danger, though, is that estates and tax law evolve, and plans put in place years ago need regular checking and, if necessary, updating to ensure that the diversified strands of an estate or farm do not tip it from a business to an investment,” says Mr Beer.

There are three broad criteria for the Balfour test:

  1. The business must have been owned by the deceased for at least two years
  2. It must be a single composite business, with the multiple components (for example, in-hand farming, exploitation of woodlands, the management of let property and sporting, leisure and tourism activities) managed as part of a single commercial entity
  3. It must be predominantly a trading business, carried on for income generation.

If these criteria are met, any elements that do not qualify for APR are likely to qualify for BPR.

“HMRC could cite marginal profits as proof that the business is not operated for gain, and is therefore ineligible for BPR; on the other hand, attempts to boost profits by diversification could lead to the estate or farm’s trading components being overshadowed by its investment profile, thereby losing BPR eligibility altogether.

“At any one time, therefore, owners must have a thorough understanding of their position.”

Review of IHT reliefs

A recent government review of IHT reliefs by the Office for Tax Simplification makes some significant suggestions regarding BPR.

At present, a business qualifying for BPR must not consist of wholly or mainly holding investments. In Balfour, this was set at not greater than 50%. 

“Importantly, this differs in capital gains tax [CGT] situations where holdover relief and entrepreneurs relief could apply, where there must be a substantial trading activity on an 80:20 split of trading v investment,” points out Mr Beer.

The Office for Tax Simplification recommends that these reliefs are synchronised with each other. 

“If this recommendation is taken up into legislation, this will inevitably make it more difficult to shelter investment assets within a trading business and the availability of BPR,” he warns.

Changing policy priorities

Complying with expected new policy approaches and priorities, with an emphasis on environmental schemes, could also change an estate or a farm’s status, he says.

“So the possibilities for tipping from a bona fide business to an investment concern are legion.

“Farm and estate owners need to be ready to take the measures necessary to remain a predominantly trading business.”

IHT reliefs for diverse businesses – key points

  • Long-term planning is needed to ensure reliefs are available
  • Regularly review the balance of trading and investment elements of a business
  • Changing government support policy could affect entitlement to reliefs 
  • Changes in tax policy regarding IHT and CGT reliefs are also on the horizon

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