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Preserving The Family Farm

Inheritance Tax (“IHT”) is charged at 40% on the value of your estate (your property and money when you die) above a value of £312,000.

But if you own agricultural property or a business your estate may be entitled to 100% relief from IHT.

Example Farmer owns a farmhouse, agricultural buildings and 150 acres, worth at the date of death say £1.2M. If his executors can claim Agricultural Property Relief (“APR”), on his death the IHT tax bill will be NIL. Without this valuable relief the tax bill would be £1.2M - £312,000 = £888,000 x 40% = £355,200. Or for a husband and wife (following the Chancellor’s announcement on the 9th October 2007) £1.2M - £624,000 = £576,000 x 40% = £230,400

You may think that because you are a farmer your estate will not pay IHT, and therefore you can pass the farm on to your family after your death without a tax burden.

However this valuable Relief is now at risk. Your hopes for passing on the farm to your family may be in danger.

The Revenue has been looking closely at the nature of farming activities, the character and size of the farmhouse and of any other buildings on the land. They have been disallowing APR or partly disallowing it in cases where, just a year or two ago, the farm would have enjoyed 100% relief from IHT.

It is not the purpose of this note to go into the detail of these cases but, in brief, the challenges by the Revenue have been on the following lines:

• Against elderly farmers who scale down their farming activities in old age
• Against “lifestyle” farmers who have farms for their amenity value rather than to farm actively from day to day
• Against certain intensive farming activities
• Against allowing APR, in whole or in part, for the farmhouse. This is a growing and worrying trend. Arguments successfully put forward by the Revenue include the following:
  
  
  1. that the farmhouse is not of a “character appropriate” for the size of the farming operation of which it is a part
  2. that the farmhouse is too big or not of a “character appropriate” for the land which supports it
  3. that the farmer occupying the farmhouse is retired or semi-retired
  4. that the market value of the farmhouse is greater than its agricultural value
  5. that the traditional agricultural buildings associated with the farmhouse have a “hope value” beyond their agricultural value

What then should you do about your farming operation?

We have studied the legislation and the cases and we have acted successfully for farming families who have faced such challenges from the Revenue. We have developed from our experience an approach to such problems which requires a close analysis of the facts.

There are things you can do and we can help you. Above all, there are some very practical steps which can be taken to give the farm the best chance of APR and the best chance of it being handed on intact.

However you trade, whether on your own, as a partnership with others, or as a company, you should try to find out what will happen to your farm after your death – and plan to save APR - unless of course you want your family to have a nasty surprise.

We can help you by reviewing your Will and your existing business arrangements; we will advise you whether any new arrangements should be put in place.

There has never been a more critical time to plan ahead.

Here are some important questions:

	Question	The Point of the Question
1.	Who owns the farm? This is not always obvious particularly when you are operating as a partnership. We would need to look at your accounts and at any Partnership Agreement	The period of ownership and the nature of that ownership are critical parts of working out a claim for 100% APR
2.	Do you let any land?	To qualify for APR at 100%, your estate must be able to recover vacant possession of it within 12 to 24 months. The old secure tenancies which depressed the value of a farm may not be enough in this time of rising land and property prices to bring the farm out of tax and land subject to these sort of tenancies attract only 50% APR The wording of Grazing Agreements and the terms of tenancy arrangements could affect the right to claim 100% APR
3.	What actual farming do you do?	If you cannot demonstrate what you do and/or you let others farm the land, unless you are careful, you may not qualify for 100% APR To qualify for APR your estate must be able to recover possession within 12 to 24 months.
4.	How much land do you own?	Selling or gifting land resulting in a reduction in the size of the agricultural unit could put at risk eligibility for 100% APR on the farmhouse. If you have borrowing, it is safer to secure it on the farmhouse rather than the land
5.	What will happen to the land when you can no longer carry out day to day farming activities?	If you abandon all farming activities you may lose the right to APR.
6.	What if you become so ill that you cannot manage your own affairs?	Somebody must have a Lasting Power of Attorney (“LPA”) to help you.
7.	What would your widow do after your death? Would she continue to be actively engaged on the farm?	Again, if she does not do any agricultural work, APR may be at risk.

If you think your farm may be at risk of a big inheritance tax bill and you would like to find out how to save tax or you would like a general review of your position, please contact us

Shirley Tull Tel: 01626 332266 Fax: 01626 883500 Email: sjt@haroldmichelmore.co.uk

We will:

1. consider with you how you currently run your farming business, looking particularly at your business structures, the nature of the farming operation and who does the work,
2. analyse and report to you the likely tax outcome in the event of the landowner’s death,
3. work with you to save inheritance tax,
4. advise how your property could be in a better position to qualify for APR or, in some circumstances, Business Property Relief.

We may advise you that we should discuss the matter further with expert valuers with whom we work as a team, and your accountant.

© Harold Michelmore & Co 2007

Please note that the information and advice in this Note is provided for general guidance only. We believe it is accurate and up to date, but you must seek personal advice on any specific case or matter. We cannot accept liability for your reliance only on information or advice in this note.