Compared to any other industry agriculture is currently offered the most generous inheritance tax reliefs.
An agricultural business will, of course, always have the option if agricultural property relief is not available upon an asset to consider whether business property relief is available.
With extra inheritance tax reliefs, one would assume therefore that dealing with the death of a farmer should be simpler than the death of any other businessman – however it usually is not.
The common position is that there is an interaction between the farming business, the homes of those involved within the business, other ancillary relatives and the operation of the business encompassed within a mixture of potential residential and agricultural property.
It is often this lack of clarity that makes it difficult to demonstrate to HMRC the true farming structure in existence at the date of an individual’s death.
Below are the three areas of most concern:
Most family farms operate under a partnership structure. Many do not have up to date partnership agreements. When an individual dies HMRC can ask for a copy of the partnership agreement, and if one cannot be provided it initially infers a lack of commerciality.
A partnership agreement should do far more than just simply saying who the partners are and that they operate a farming structure.
- It should be clear from the partnership agreement how land is held. Is it held by an individual outside of the partnership and used by the partnership? Or, is it owned by the partnership itself? If it is held by the partnership itself, is there a capital schedule to show the up to date position of land held.
- If land is owned by the partnership, then the buildings erected on the land would tend to be financed by the partnership and owned by the partnership. The confusion can arise where there are buildings erected by the partnership on land that it doesn’t own.
- If land is owned outside of the partnership, then banks will require the landowner to offer security. Is the borrowing then personal to an individual or are they partnership borrowings?
- Are the deeds up to date and do they reflect the true ownership?
Houses / Farmhouses
Obviously, nowadays farms can have more than one residence.
It is useful to ascertain which property should be treated as the farmhouse. Evidence should be available as to why this particular property is occupied by a famer and is the hub of the farming enterprise. Choose the correct property.
Sometimes family roles in the farm can change, for example, due to retirement. Consider whether the change of an individual’s status in the business affects the house they live in.
If you get the two points above correct, then this makes wills simpler to structure. It will be clear what is to be gifted by a gift of the partnership share and what may need to be gifted separately.
It should also be pointed out that HMRC are still in the throes of reviewing agricultural property relief (as they have been for some time). It is envisaged that in the near future there will be amendments to the inheritance tax treatment of farms, therefore there may be advantages in making amendments to structures now prior to any changes while the allowances are still generous.
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Rob Fearnley has more than 13 years’ experience in handling succession, inheritance tax planning, wills, trusts and agricultural and business property relief matters for clients, and Bowcock & Pursaill Solicitors are members of the Agricultural Law Association.