Farm partnerships advised to check for property tax relief

Old partnership structures could land farm businesses with unexpectedly large tax bills, an accountant has warned.

Farmers may have shaped their businesses decades ago to cut how much inheritance tax they would have to pay, according to accountancy and financial planning firm Old Mill.

But tax changes since then mean farms that have not brought themselves up to date may miss out on current reliefs.

See also: Tax implications of bringing sons into partnership

Old Mill director of rural services Paul Neate said that in the 1970s many farms moved land ownership outside of the partnership and rented it back to the business.

Under the capital transfer tax, which preceded inheritance tax, this was advantageous because owner occupiers could claim 50% relief and landlords could claim 30%.

By placing an Agricultural Holdings Act tenancy with the partnership, this devalued the farm asset for tax purposes and also gave the partners the landlord’s relief. As a result, only about 35% of the land value was chargeable.

Property relief

Under today’s inheritance tax, Mr Neate explained, farmland qualifies for 100% agricultural property relief, as long as certain conditions are met.

Any non-farming assets, such as cottages or farm buildings rented out, can qualify for 100% business property relief.

But if these are held outside of the partnership, under the old structure, they will only receive half the relief.

Mr Neate said that decreasing farming returns and increasing diversification activity made it sensible to bring such assets back into the partnership structure.

“It may well be that you have already instigated such action, but just because your accounts include the farm on the balance sheet this is not indicative that the assets are actually partnership property,” he said. “You need to refer to the deeds and the land registry.”

Mr Neate added that any changes in the business structure, in the years since it was set up, may not have been recorded in the partnership agreements.

This could lead to uncertainty over whether new partners are entitled to a share in property or departing partners have made a disposal, perhaps inadvertently, for capital gains tax purposes.

“This raises the risk of disputes over land or share entitlements,” Mr Neate said.

Are you, like many other farms, missing out on tax claims for R&D?

If you’re a limited company, you could be eligible for tax credits if you’re carrying out R&D on your farm. For more information and to find out if you’re eligible visit our R&D tax credits page.

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