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Future proofing the family farm… Don’t lose 40% to the tax man because of the younger generations fresh ideas!

Posted on: 25 Sep, 17

It’s probably a good idea to diversify the family farm. But with all this solar power, paintballing and milk vodka (and who knows what else!) does APR still cover these new farm-friendly ideas? Oury and Clark discuss.

I was at a ploughing match last weekend and got chatting to some farmers who were having a heated family debate. The next generation were looking at diversifying and increasing activities into things like solar farms, wind farms, barn and yurt rental, paint balling in the woods and even creating new product lines such as milk vodka!

Clark says...
Oury says...

Milk Vodka?!?

Milk shots

Yes, apparently it’s delicious. Well… actually I'm not sure vodka is ever delicious - but hell it works and doesn’t taste terrible…

Anyway - The older generation were concerned about succession planning and how too much diversification could lose valuable tax reliefs, such as Agricultural property Relief, landing the next generation with a large inheritance tax bill!

Oury, what are your views on succession planning and tax breaks, will this impact on tax reliefs and should they not diversify?

Clark says...
Oury says...

This is a common and interesting problem you have encountered, many family business are worried about succession planning and have constant “discussions” / heated debates about it. I knew one family who “discussed” this every time the daughter had a new boyfriend!

Yeah, I can imagine it’s tricky, as most business people want to ensure their legacy survives, which - given the recent talk of cutting farmers food subsidiaries - is tricky unless they diversify.

Clark says...
Oury says...

This is true, Clark, however that was just a think tank.

Think Tank

Oh right, so what can farmers do to protect tax reliefs?

Clark says...
Oury says...

Agricultural property Relief (APR) is an inheritance tax relief reducing the value of an estate by up to 100% when passing the farm on to the next generation at death. “Agricultural property” means land or pasture and includes woodland and buildings used in rearing livestock. It also includes building and woodland which are ancillary to the agricultural land or pasture.

Inheritance tax is a tax on someone’s assets at death. Very roughly speaking - you get given an allowance per person of £325k (double if you are married and one spouse dies) and above that get hit at 40%…

Okay, so you kinda lost me there Oury, does that mean all farmers can get this relief? If so, why were they bothered about it?

Clark says...
Oury says...

Unfortunately not, it’s a complex area. There are strict conditions which need to be met to qualify. For 100% relief the donor must have owned the land for 2 years prior to the gift (7 years if tenanted) and used it for agricultural purposes.

Great, what do HMRC class as agricultural purposes? Would paint balling in the woods and solar panels count?

Paintball

Clark says...
Oury says...

Well Clark, that can be where problems arise. HMRC see things like growing crops for human or livestock consumption, growing seeds and plants, breeding of horses and hop growing as agricultural. However, they do not view paintballing in woods, music festivals, wind farms or rental of farm cottages as agricultural.

HMRC also view empty or derelict buildings as non-qualifying, along with some garages and barns which are not ancillary to the agricultural land.

Breeding of horses can be tricky too, as stud farming does count, but running a livery stable (a stable for horses), even a grazing one, does not, unless the horses are to enter the food chain! Which of course, is absolutely absurd…

Gosh, that does sound tricky, what about the Farmhouse and woodland, I overheard the Farmers saying that might not count? Surely the Farmhouse would get APR as that’s where the Farmer lives…right?

Clark says...
Oury says...

Good question, Clark. Woodland counts if it is ancillary that means does not dominate the farming activity, if so then yes, it would be included within APR.

The Farmhouse is an asset HMRC are keen to tax. HMRC want the “character appropriate” test to be passed i.e. HMRC do not like large Farmhouses and small amounts of land, particularly if all the land is occupied under a grazing agreement. Once this test has been passed, the second stage is to ensure the Farmhouse is occupied by a working farmer (landlord or tenant).

Farmhouse

HMRC will then apportion a value to the Farmhouse which applies to agriculture, this is usually 60-70% of the market value.

Got it! But… the daughter mentioned something about her Father going into a care home and the property remaining empty, she seemed to think this might be an issue?

Clark says...
Oury says...

She is correct, as I mentioned above the Farmhouse must be occupied, should it not be occupied - APR will not apply and inheritance tax will be due!

Farmhouse

How would they decide who takes the house over? Would that be in a Partnership agreement or something?

Clark says...
Oury says...

Possibly, however Partnership agreements can invalidate APR, especially if there are clauses to dissolve the Partnership on death, if in doubt a review of the agreement should be carried out before HMRC get their hands on it!

Right, lots to consider, so paintballing, wind farms and rental properties are out, would that mean APR is denied on everything?

Clark says...
Oury says...

Luckily not, APR would be available on the agricultural part of the business and Business Property Relief (BPR) may be available on other business activities.

Okay, what is BPR is that better or worse than APR?

Clark says...
Oury says...

It’s a different but similar relief. Similar, because it is a relief which allows the passing of assets from one generation to the next with no tax consequences; different, as it is not unique to farmers.

Any business assets which have been owned for 2 years prior to the gift (or death if via will) are eligible for 100% inheritance tax relief. This could include a separate business, independent to the farming activities, e.g., a solar farm operated as just that and not connected with the Farming business.

Great, so basically if you start a new trade that isn’t agriculture - you need to have been operating it for two years and clearly separate it.

Clark says...
Oury says...

Yes basically…. You need a plan

So, diversification is possible but care needs to be taken to ensure full reliefs are available. Does any of this need to be reflected in a will?

Clark says...
Oury says...

Not necessarily, APR and BPR are reliefs on qualifying assets, so they don’t need to mention the reliefs in a will. BUT the Partnership agreement and will should be reviewed to make sure nothing prevents APR and BPR from being applied!

Okay - got it. Right - I’m off to have a milk vodka and a lie down…

Clark says...

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