Tom Barrow, partner and head of country valuations at Knight Frank, said the importance of an open discussion about the business and what will happen when older members retire is often overlooked.
He said: “You have to talk about what you are trying to achieve as a farming family and how to keep the farm or the assets which form a part of the farm and pass this onto the next generation so the farming business can continue.”
Mr Barrow said attention must be paid to which assets in an estate qualify for agricultural relief and can be passed on.
“What is the ownership structure? Is it owned solely by one individual or is it a partnership? How do you wish to keep the business in the family and ideally minimise inheritance tax? Often these issues are swept under the carpet.
“People can be afraid to raise it or do not want to face up to it. It can be a problem when the younger person is approaching the patriarch or someone more senior.”
Although it can be a sensitive issue, Mr Barrow advised families to take a long-term approach.
“I am a fan of the holistic approach – get the family around the table with an accountant or solicitor, possibly a valuer, and get a set of objectives.”
He said this is especially important in the case of a death or divorce.
“The farm is the pension and, in many cases, it pays a day-to-day living. As a result, many farmers cannot walk away from the farm because it is their pension and their home.”
Mr Barrows said the way the tax regime is structured provides extra pressure.
“To qualify for agricultural property relief, the day-to-day decisions about the business need to be made at the farmhouse. If the house is severed, you may lose relief on the house. It is something people have got to be aware of.”
Agricultural relief on farmhouses and cottages
Buildings must be of a nature and size appropriate to the farming activity which is taking place.
The property is valued as if it could only be used for agricultural purposes. Any value more than this ‘agricultural value’, such as the market price of a country residence, does not qualify for agricultural relief.
A cottage or farmhouse must be occupied by someone employed in farming or:
a retired farm employee
the spouse or civil partner of a deceased farm employee
They must occupy the property as a:
You can pass on some agricultural property free of Inheritance Tax, either during your lifetime or as part of your will.
Agricultural property that qualifies for Agricultural Relief is land or pasture that is used to grow crops or to rear animals intensively. It also includes:
These do not qualify for Agricultural Relief:
A rural tax expert has issued an alert to elderly farmers to get their tax affairs into shape following a renewed drive by HM Revenue and Customs (HMRC) to clamp down on agricultural property relief (APR) on land and farm buildings.
Stephen Meredith, partner and head of the taxation department at Midland law firm mfg Solicitors, has sounded the alarm following moves by HMRC to deny the tax break if it cannot be proven landowners are doing enough active farming work to qualify.
The crackdown has meant that estates of deceased elderly farmers have been left struggling to meet Inheritance Tax liabilities and interest payments.
The tax specialist’s warning comes after he successfully challenged HMRC in two recent cases where HMRC was seeking to deny APR to veteran farmers on their homes and, in one case, land as well.
Despite the two case wins Mr Meredith says he remains ‘deeply concerned’ that many farmers and their futures remain at risk if they have not got their affairs in order.
He said: “This is an area of tax law where HMRC have been increasingly taking a tough stance on the basis that elderly farmers are not carrying out sufficient agricultural activities to justify a claim for APR.
“In one case the farmer had passed away and because the probate papers referred to him as ‘retired’, HMRC argued his business was not commercial. We proved it was. In another case HMRC tried to deny APR because the farmer had reduced the scale of his operations. This was unsurprising because he was 84-years-old when he died.
“It would be nonsense that a farmer can farm all his life and then lose APR simply because old age forces him to cut back on his farming activities in his last years. If that was the case it would be very rare for any farmer who lives to a ripe old age to qualify. That surely cannot be the intention of the tax rules but it is what HMRC are trying to enforce."
Mr Meredith said farmers must be aware of the crackdown and the 'general lack of understanding that HMRC have about the farming sector'.
He added: "Many farmers would be very surprised to be told that having farmed all their lives their estates will not qualify for full APR on their deaths. In some cases investment assets, such as barn conversions or let cottages, can attract business relief with proper planning.”
Do you need advice?
Mr Meredith and his team are offering free 30-minute telephone consultations to help farmers understand their tax position and obtain advice as to how they can improve it. Readers can telephone 01562 820181 or email firstname.lastname@example.org