Agricultural Tax Reliefs for Farmers

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Our South Molton office specialises in agricultural law. In this article Terese Kingman, a Legal Executive based at our South Molton office, looks at tax reliefs available for farmers:

Inheritance tax (IHT) on a single person’s estate presently stands at £325,000 April 2013. Anything over and above that figure will be liable to IHT at 40%.

There is no tax to pay between spouses. So, if one spouse dies and leaves their entire estate to the other, their tax free allowance of £325,000 is transferrable to the survivor. Therefore on the death of the surviving spouse there will be a total allowance of £650,000. This means the estate would have to pay IHT at 40% on anything over and above £650,000.

People often like to make substantial gifts during their lifetime. However, there are strict rules governing this to prevent a person who knows they are likely to die from making a lifetime gift in order to save tax. Therefore if a donor dies within 7 years of making such a gift then that gift will be included within his estate for tax purposes. Presently, if a ‘potentially exempt’ lifetime gift is made the rate of tax will be charged at the rate of tax in force at the time of the gift. Essentially this can be a useful planning tool if a donor is worried that IHT tax rate may increase.

Agricultural Property Relief is a very important form of relief for farmers. In circumstances where a farmer makes a lifetime gift of farmland, to ensure the person receiving the gift does not lose the relief he should continue farming the land for the whole of the 7 years after receiving the gift since if the donor dies within 7 years of the gift and the donee stops farming the relief will be lost, leaving the donor with a potential tax bill.

Potential tax consequences must therefore be considered before a farmer makes a lifetime gift of his farm to ensure that the Agricultural Relief will not be lost.

Business Property Relief is another form of relief available to the farm’s business assets. Relevant business property includes any land, buildings, plant or machinery owned by the deceased and used by him wholly or mainly in the course of his business during the last two years immediately before his death.

However, Agricultural Property Relief still remains the most important relief available to farmers and their families when passing on the family farm. It must be stressed that this relief is only available on agricultural property to the extent of the value of the land which is used for agricultural purposes. For example, land with development value or amenity value will not receive relief and will be subject to tax even if the farmer intends to farm the land. In these circumstances it would be prudent to consider whether Business Property Relief would be available on that value.

Other instances where 100% relief will be available are land let under a Farm Business Tenancy or a Grazing Agreement. However, land let on a tenancy granted prior to 1 September 1995 will only receive 50% relief. If the property is mortgaged then relief is only available on the equity, but of course the mortgage debt reduces the estate anyway.

And what about the farmhouse? Agricultural Relief may not be available unless it can be proved to HMRC that the farmhouse forms an integral part of the running of the farm. It must be occupied by the farmer or a person who farms the land. Unfortunately a retired farmer or a person living in the property who lets the land (e.g. for grazing) will not be entitled to relief on the house.

If you would like to discuss the implications of giving away your agricultural assets please contact Terese Kingman at Slee Blackwell 2 Lime Court Pathfields Business Park South Molton on 01769 575982 or email at [email protected]