Inheritance Tax for farmers and their families
The current inheritance tax regulations have remained largely unchanged for the last 3 years, due in no small measure to the recession. Unfortunately, we don’t have an inside track on Government thinking and future taxation policy, so this article will concentrate on the state of play as we enter 2012 and focus on the most important aspects of IHT that people should be aware of.
Inheritance Tax can arise on a deceased person’s estate as soon as it exceeds £325,000, at a level of 40% of the excess over that figure. A husband can transfer his allowance to his wife and vice versa so the total allowance between couples is £650,000. Gifts between spouses do not attract Inheritance Tax. Therefore, the nil rate band on the first death is described as transferable.
Gifts made in the last seven years are added back to the estate and therefore eat into the £325,000 threshold. A gift of farmland, whilst potentially attracting Agricultural Relief, could lose that relief if the donee gives up farming within seven years and the donor dies within the same period. There is widespread misunderstanding about tapering relief available over the last three years of the seven because this only applies to the tax actually payable on the gift over £325,000 and not all gifts that are clawed back.
There are some exemptions such as the annual exemption of £3,000 per annum and also gifts made out of income.
The most important relief for farmers and their families is Agricultural Relief, although Business Relief is also important as it is available to the farm’s business assets as long as they are used in a business operated by the deceased. Debts of the business can only be deducted if they are genuine business debts.
Agricultural Relief is available on agricultural property to the extent of its agricultural value. The property must have been occupied by the deceased for the previous two years or owned for the last seven years and occupied by someone for agricultural purposes (i.e. let or licensed to someone else).
Agricultural Relief is allowable on agricultural value. This is the value of land used only for agriculture. If the land had development value or even amenity value then that extra value is subject to tax even if a beneficiary wishes to farm it. There is no relief on pony paddock value but interestingly a stud farm will get relief. The same goes for the house. If it is an integral part of the farm then it may get relief, but it must be occupied for the purposes of the farm. So, if an elderly farmer has gone into a residential home then it is no longer occupied for agricultural purposes even if it had been occupied by him for most of his life and he wanted to go back there.
The farmhouse must be of a character appropriate to the property. A mansion probably will not get full relief. The elephant test will apply. In other words, would a fair minded person regard the property as a farmhouse if they saw it?
If property is occupied by, say, a banker who lets out the land then his estate will not get relief on the house, though he will still get it on the land. Nor will a retired farmer get relief on his house if he simply lets the land which he used to farm. This point will also usually apply to grass lets.
If the property is a mansion occupied by a farmer it may only get partial relief. The District Valuer may value as if it had an agricultural occupancy condition. This might for instance be 70% of its real value.
Land let under a Farm Business Tenancy or a Grazing Agreement gets 100% relief. If let under an AHA then 50% relief is available.
Every case is decided on its own merits. Most ordinary working farms are able to pass from parent to child without Inheritance Tax being paid. However the Revenue is taking a closer look at all taxation. In 2010 a Compliance Unit was set up to check tax returns. In the past quite a number of claims for Agricultural Relief have gone through because the Revenue is too busy to check. However, more inspectors means more challenges.
There is not a ready answer as to what each family should do in order to pass its family farm from one generation to the next without Inheritance Tax becoming payable because each family’s aspirations and circumstances are different. However the potential tax consequences of passing a farm on during the lifetime of the present owner must be considered. There must be a determination by the donee to carry on farming in case the donor dies within seven years of the date of death when as mentioned above the relief will be lost.
A gift also attracts a notional gain if the land increases in value. The gain can be held over on a transfer by parent to child, but it is only held over. In other words no tax is payable by the donor at the time of the gift but the donee would pay tax on the gain if he sells the property. The gain that he would pay tax on would be the gain from the time of his parents’ purchase until his sale. There could be a case for transferring the farmhouse as any transfer would attract relief from Capital Gains Tax because of its residence status.
If a parent leaves the same property to a child on his death then there is no Capital Gains Tax, although there is the possibility of Inheritance Tax. Under the present regime of agricultural relief it may well be best not to transfer the farm until the parents’ death. There will not usually be a problem with getting the relief on the land. It is usually the house that presents the problem as it must be occupied by the farmer – someone who needs it for the operation of the farm. So it may pay for the parent(s) to move out and let the child and their family move into the house. If there are two houses on the farm then the child ought to live in the more valuable if it can be presented as the farmhouse.
There is no doubt that it is important to keep up the appearance of farming the holding. The farmhouse must be occupied by a working farmer. If a farmer really wants to retire then he is best advised to let his child live in the house. If they are in partnership an obligation in the partnership deed requiring all partners to occupy houses on the farm may be helpful. It would also assist if the parent partner(s) can show real involvement in the business for relief is to be claimed on the house that they have moved in to.
If you require guidance on inheritance tax for farmers call us on 01769 573771 or email [email protected]