Cold comfort on farms’ IHT relief

Tuesday, August 09, 2011 | Posted by: Naomi Smith
Categories: Business, Protecting your wealth | Tags: business, tax, property, inheritance tax, IHT, relief, liability, Naomi Smith, estate planning, value, APR, farming, IHT planning, agriculture, exemption, farms, agricultural property relief, leasing

Agricultural property relief doesn’t always offer farmers and farmhouse owners an exemption from inheritance tax (IHT). Here, for example, are two scenarios that may trigger a crippling final IHT bill for the unsuspecting. Read on to make sure you don’t have to sell the family farm…

(Sidenote: This follows on from my post last month on the trouble with business property relief. You can also read more about IHT tax planning and ways to protect your wealth in the links at the end of this post.)

Many farming families believe that they will not have to pay IHT on the family estates. For many, this will be true; there is a whole crop of reliefs potentially available to farmers to help avoid or minimise IHT, including:

• agricultural property relief
• business property relief
• woodland relief.

So with all of these options, how could a farm fail to attract full relief from IHT? Very easily indeed, I’m afraid. Let me tell you a horror story, or two…

Leased farms and IHT
Farmer Jack was 101 when he died – he had long since given up farming. His three daughters didn’t want to take over running the farming business so in 1990 he let the farm out on a long lease.

When Farmer Jack died HM Revenue & Customs (HMRC) levied IHT on the value of the farmhouse, where Farmer Jack lived, and 50% of the value of the farmland.

Why?

Because, firstly, the farmhouse was no longer considered to be the place from which the farming operation was run, as the land was let out. Secondly, as the farmland was let on a lease prior to 1 September 1995, and Farmer Jack did not have the right to vacant possession of the land within 12 months or less, only 50% agricultural property relief was available on the value of farmland.

If Farmer Jack had obtained some IHT advice he could have considered ways to mitigate his IHT bill, but now it is too late. And it’s not just with letting land that problems arise.

Agricultural value of farmhouses vs property value
Daisy ran and operated a farm in Surrey until she suddenly passed away at the age of 69. She had inherited the farm from her parents and had faithfully farmed it all of her life. The farmhouse was a large Victorian home with half a dozen bedrooms and several reception rooms.

HMRC agreed that her house qualified for agricultural property relief on her death. However, it still sent her executors an IHT bill.

For what reason?

Because agricultural property relief is only available on the agricultural value of property under the law, HMRC claimed that the agricultural value of the farmhouse was less than the full market value of the farmhouse, and hence levied IHT on the difference. And was it entitled to do so? Unfortunately, yes.

In previous tax cases the courts have advised that the agricultural value of a farmhouse is the value of the farmhouse, if it were subject to a perpetual covenant prohibiting its use otherwise than as agricultural property. As Daisy’s house was in Surrey, it would have been worth a lot more to wealthy city folk looking for a quiet weekend retreat, than as a home for a farmer.

If Daisy had sought some IHT advice, perhaps she could have avoided the IHT bill, or at least made provision to pay it, so the family’s farmhouse did not have to be sold on her death.

And the moral of the story is…
Do not assume that your farm qualifies for full inheritance tax relief. Failing to plan for IHT can leave not only a sizeable tax bill, but in the worst case scenarios, force a family to sell property that has been in the family for generations. Therefore, seek professional advice early on.

Visit our Inheritance Tax page for further information – or ask a local tax adviser directly.

Image: © Patrick Byrne

You might also find these posts useful:

* Read more posts on Protecting your wealth
* Advanced strategies for reducing your IHT bill
* Avoiding inheritance tax with business property relief? Beware these nightmare scenarios…