We attended the Cornwall Farm Business Awards 2016, run by the Addington Fund, a registered farming charity. Their main area of work is to provide homes for farming families who have to leave the industry, through no fault of their own, and by doing so will lose their home. In times of emergency and where hardship prevails they are also able to assist with a grant towards certain business costs.
Since 2010, we have sponsored an award for Best Woman in Farming. This led us to consider Agricultural Property Relief (APR) and Business Property Relief (BPR).
APR and BPR were brought in predominantly for farms and businesses when having to be broken up to pay Inheritance Tax. Having to break up an agricultural concern or a business was considered a counter-productive measure by HMRC. If a farm or company no longer exist, it creates unemployment and also loss of income tax from the business. So changes were made.
Many farms and businesses will, and should, qualify for 100% (APR or BPR) but many conditions need to be considered and met to attract the 100% relief.
What is a farm house? Is one such condition. For a house to satisfy the conditions it must be agricultural property and also it must have been used for the purposes of Agriculture for the relevant period. There is much case law on this but the cases concluded “it must be a dwelling for the farmer from which the farm is managed”.
The rulings can be contentious and also an ownership test will have to be satisfied.
Delving further it has to be considered whether or not the property is ‘character appropriate’. This looks at the whole proposition - is it a really nice house sitting on some farmland? Or is it appropriate in size content and layout in relation to the farm that it’s on? - For example a £400,000 farm, of which the house was £350,000 sitting on 4 acres would be an interesting conversation with the revenue!
However, a farm cottage can also qualify for APR but it would need to satisfy two main conditions. Does someone who has the required status occupy the farm cottage? And, is it character appropriate to the land? As described above.
HMRC deny APR on farm houses on the basis that they are not character appropriate.
Moving on from this, the property must be agricultural property and also used for agricultural purposes. What does that mean? Well apart from the above, it needs to be proven that the property is being used for the correct reasons.
In short if you bought a farm and just had lots of land around you, to enjoy the tranquility and space and didn’t use it for agricultural purposes, you would probably fail for APR.
Agricultural Relief is due at 100% if the person who owned the land farmed it themselves; or the land is used by someone else on a short-term grazing license; or if it was let on a tenancy that began on or after 1 September 1995.
A property that was owned since before 10 March 1981 and rented out before then can qualify for 100% relief if it would have qualified under Schedule 8 Finance Act 1975 had it been transferred before 10 March 1981 and the person who owned it had no possible right to vacant possession between that date and the date of the current transfer.
Relief is due at a lower rate of 50% in any other case.
If the property was sold at less than the market value, relief is limited by the proportion that was given as a gift.
For example, John sells a field worth £2000 on his farm to his son David for £500 who is on the farm next door. This means that John is giving David a gift of 75% of the value of the field.
David sells the field a year later and uses the £2000 from the sale to buy another field for £2000.
John dies 3 years after the sale.
When IHT is calculated the original market value (£2000) of the field (the property that was transferred), rather than the current market value of the field (£2500) is included in John’s estate and is eligible for Agricultural Relief.
However, this is reduced by 75% because the original transfer was 75% gift. So the final amount eligible for Agricultural Relief is £500. .
The lower rate of 50% applies in most other cases. So, in simple terms where you own the agricultural property solely and occupy it for agricultural purposes, you would then be able to give vacant possession of the land and subsequently qualify for APR. Simple really!?
You can get 100% Business Relief on: a business or interest in a business, and shares in an unlisted company. You can get 50% Business Relief on: shares controlling more than 50% of the voting rights in a listed company, land, buildings or machinery owned by the deceased and used in a business they were a partner in or controlled, land, and buildings or machinery used in the business and held in a trust that it has the right to benefit from.
You can only get relief if the deceased owned the business or asset for at least 2 years before they died.
What is the takeaway from all of this – it can be complex so use a solicitor to plan your business succession with an updated and current Will, involve an accountant and/or Solicitor especially if you are an executor in these circumstances and of course a good Independent Financial Adviser who can advise you on Inheritance Tax Planning solutions.
For further information on the Addington Fund please go to www.addingtonfund.org.uk
For a free, no obligation initial chat about your individual finances, call us on 0800 0112825, e-mail info@wwfp.net or take a look at our website www.wwfp.net.
The value of shares and investments can go down as well as up. Your home may be repossessed if you do not keep up repayments on your mortgage.
Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Conduct Authority. 'The FCA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up. Your home may be repossessed if you do not keep up repayments on your mortgage. For the purposes of mortgage Worldwide Financial Planning is a credit broker and not a lender.
