Inheritance Tax for farmers and their families
Inheritance Tax for farmers and their families
INHERITANCE TAX FOR FARMERS AND THEIR FAMILIES
MATTHEW SLESSOR WEALTH MANAGEMENT
Over the years, I’ve advised may families in respect of Inheritance Tax planning. Helping farming families are somewhat of a specialism of mine, and this section of the website, aims to set out some of the complexity facing Cumbrian farmers today.
Why not simply gift the farm? A gift of farmland, whilst potentially attracting Agricultural Relief, could lose that relief if the person receiving the gift gives up farming within seven years and the person making the gift dies within the same period.
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.
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.
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. The same goes for the farmhouse. 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.
Land let under a Farm Business Tenancy or a Grazing Agreement gets 100% relief. If let under the historic Agricultural Holdings Act then 50% relief is available, so its important to understand when the tenancy was established.
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. HMRC’s 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 single 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 farmhouse 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 little 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.
One aspect that can often crop up is that of children who won’t actually inherit the farm, but are heirs in their own right, and expect to be treated equally on the passing of the parents. I have over many years help families redress the inequity of a son or sons inherit the farm, with another son or daughter branching out on their own to pastures new feeling somewhat dis-inherited. There are options, and my role is to come up with viable solutions, be that through simply setting up a life insurance policy, or creating a trust for non-farming heirs.
Where financial planning and farming can be really mutually beneficial, is the areas of retirement planning, and the benefits of extracting monies from the farm business (be that a sole trader, partnership or limited company) and investing into personal pensions. When you pay into a personal pension, you are able to claim tax relief of 20%, meaning that contributions of £32,000 will benefit from income tax relief, to boost the pension fund to £40,000 immediately, and then this capital can grow to offset inflationary rises over the years.
Directors of Limited Companies can pay into their own personal pensions, reducing their corporation tax bill in the final analysis, and are an effective way of extracting monies out of the company, without suffering punitive tax rates, soon to be elevated in the 2023/2024 tax year.
Over the years, I’ve advised may families in respect of Inheritance Tax planning. Helping farming families are somewhat of a specialism of mine, and this section of the website, aims to set out some of the complexity facing Cumbrian farmers today.
Why not simply gift the farm? A gift of farmland, whilst potentially attracting Agricultural Relief, could lose that relief if the person receiving the gift gives up farming within seven years and the person making the gift dies within the same period.
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.
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.
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. The same goes for the farmhouse. 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.
Land let under a Farm Business Tenancy or a Grazing Agreement gets 100% relief. If let under the historic Agricultural Holdings Act then 50% relief is available, so its important to understand when the tenancy was established.
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. HMRC’s 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 single 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 farmhouse 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 little 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.
One aspect that can often crop up is that of children who won’t actually inherit the farm, but are heirs in their own right, and expect to be treated equally on the passing of the parents. I have over many years help families redress the inequity of a son or sons inherit the farm, with another son or daughter branching out on their own to pastures new feeling somewhat dis-inherited. There are options, and my role is to come up with viable solutions, be that through simply setting up a life insurance policy, or creating a trust for non-farming heirs.
Where financial planning and farming can be really mutually beneficial, is the areas of retirement planning, and the benefits of extracting monies from the farm business (be that a sole trader, partnership or limited company) and investing into personal pensions. When you pay into a personal pension, you are able to claim tax relief of 20%, meaning that contributions of £32,000 will benefit from income tax relief, to boost the pension fund to £40,000 immediately, and then this capital can grow to offset inflationary rises over the years.
Directors of Limited Companies can pay into their own personal pensions, reducing their corporation tax bill in the final analysis, and are an effective way of extracting monies out of the company, without suffering punitive tax rates, soon to be elevated in the 2023/2024 tax year.
Blessed Are Those Who Plant Trees Under Whose Shade They Will Never Sit – Ancient Indian Proverb
The sweet spot in respect of taking advantage of this route, is that of succession planning. The benefits of paying into personal pensions are that they can be nominated to pass to the surviving spouse or partner, children and/or grand-children to provide them with a tax free pension pot, should the original policyholder die before age 75, the monies are entirely free from Inheritance Tax, Income Tax and CGT.
As I’ve worked with many farming families over the years, one really effective strategy has been that of grandparents, who have spare income, being able to contribute into the retirement plans of their grand-children. While one could argue the grand-children would prefer the funds for a first car or home, or to fund themselves through University, the benefits of this strategy is that each child under 18, is able to have contributed £3,600 gross each tax year, with the net contribution being £2,880 from the grand-parent or parent, generating growth of 20% immediately, and not having to have paid income tax in the first place.
The fruits of this investment will be reaped many decades later by the grand-child, allowing the monies to benefit from long term capital growth through stock-market investment. What a wonderful legacy to leave your grand-children, a means to generate a monthly income in their own retirement, and a regular reminder of how much they were once much loved.
