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Will your farm or croft suffer a surprise Inheritance Tax bill? With Harper Macleod

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Julie Doncaster
Julie Doncaster

Julie Doncaster is a partner in Harper Macleod’s private client team in Inverness

For nearly 30 years, farmers have been able to pass down their farms and crofts to future generations without paying any Inheritance Tax (IHT) following the introduction of Agricultural Property Relief (APR). This has allowed a significant number of family-owned farms and crofts to remain intact, preventing them from having to be sold to fund a potentially-large IHT liability, bearing in mind the rate of IHT currently sits at 40%.

Business Property Relief (BPR) is also often available to farms operating as businesses, allowing the assets and equipment to pass free of IHT, subject to various conditions, including the requirement for the deceased to have owned the business for two years.

As entrepreneurial and innovative farmers find new ways to diversify and expand their businesses, they should check whether diversification has any impact on the availability of these valuable reliefs.

For example, if a farmer renovates an old building to be used as a wedding venue, or alongside land to be used for farm experience days, these may qualify for BPR but not APR, which is only available for genuine agricultural purposes.

One of the most common diversification routes is for farmers to provide a horse livery service. Unfortunately, on many occasions HMRC has decided this falls foul of the required criteria to qualify for APR/BPR unless other extensive facilities such as grooming are available. The good news is that stud farms continue to benefit from relief.

Before the age of modern machinery when farms employed and housed workers, the value of the farm cottages fell within APR/BPR. However, it is now more commonplace for these properties to be converted into holiday lets. This is a grey area for HMRC. Whether or not APR/BPR will apply on these businesses will depend on the individual circumstances. For example, if there is simply a key box and a brief set of instructions for the guest, it is unlikely this will qualify. To have the best chance of your holiday let achieving the IHT exemptions, guests should be treated to a hotel-like or bespoke experience. Providing a welcome hamper or activities as part of the package is more likely to swing things in favour of the owner.

We are also seeing see more wind turbines on farmland. Farmers must be careful as this asset will be unlikely to receive any relief, particularly if they simply rent the land to an energy company, with no other involvement.

Farmers and crofters are inevitably tempted to reduce farming activities as they get older, leading to the biggest challenges of APR/BPR availability.

We recently saved a client £50,000 by negotiating with HMRC, before matters reached court. HMRC claimed the deceased farmer’s house was not appropriate to the farming activities and should not receive full IHT relief. We successfully argued otherwise!

How the land or farm is held is another important point. The reliefs can be restricted to 50% if the land or farm used by the business is in the name of the farmer rather than held as an asset within the business. Any changes in this regard should be made with a keen eye on family disputes and a potential legal rights claim.

It is best to take legal advice on succession planning before diversifying or restructuring a farming business, to ensure the valuable IHT reliefs are maintained or maximised.

Harper Macleod
Harper Macleod

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