Leigh Beirne is part of Harper Macleod's private client team and a regular visitors to Shetland and other areas where crofting and farming issues are often to the fore. Here, she highlights the potential value of certain reliefs on Inheritance Tax liability, and how to ensure you don't allow your estate to be diminished unnecessarily.
Those who are actively running a farm or croft should be able to claim Agricultural Property Relief (APR) and often also Business Property Relief (BPR) to reduce or eliminate the amount of Inheritance Tax due on their estates on death.
The APR and BPR reliefs available on a farmhouse, land and/or business can result in huge tax savings, removing 100% or 50% of the value from an estate immediately, thereby preserving the individual IHT allowance.
Given these potential benefits, HMRC are now scrutinising applications for APR and BPR rigorously. In order to qualify, strict criteria must be adhered to.
First and foremost, the agricultural property must have been owned and occupied for agricultural purposes for a period of two years immediately before death if occupied by the owner or their spouse/civil partner, or for a period of seven years if it is occupied by someone else.
"Agricultural" has not been specifically defined by HMRC and therefore takes its ordinary meaning which includes livestock farming, growing crops and fruit but not grazing horses.
Farm buildings and farmhouses are included within the remit of APR provided they are appropriate in both size and nature to the farming activity being carried out. Evidence of the farm business being carried out from the main house will also be helpful.
Over time, some farms and crofts have reduced what might strictly be regarded as farming. The issue here is that if there was a large farm house proportionate at the time to the farming or crofting activities, as the farming element falls away, the relief that would have attached to the farm house could be lost or reduced.
This rule has caught out a number of city dwellers over the years that have moved to large farm houses in the hope of securing these valuable reliefs. However, maintaining a few chickens and an orchard will not be enough.
Another key point to consider is if the farmhouse is noted within the partnership accounts and clearly belongs to the business, it can attract up to 100% APR. If on the other hand, the farmhouse is owned by the farmer and the farming partnership only uses the property, the relief is reduced to 50%.
As a note of caution, if held within the partnership/business accounts, the farmhouse could be classed as moveable property. Moveable property is relevant where a child or spouse in the family claims their Legal Rights, (an entitlement to a proportion of movable estate on death) irrespective of the terms of the Will. There could be serious repercussions to the cash flow of the business if a claim is made which includes the value of the farmhouse and other buildings.
Accordingly, any family issues should be considered before making any changes to the structure of the farm.
As farmers diversify and find different income streams, perhaps from cell phone masts, wind turbines, horse livery and sporting and adventure activities, the valuable APR relief may start to disappear as the land is no longer occupied for agricultural purposes. For some activities, BPR will apply.
However, where the business activity falls into the category of a rental or investment business, this relief will not be available. Renting out the former farmer cottages to non-farm workers is a good example of this. Depending on the total income generated, this could have an impact on both the APR and BPR available.
Grazing licenses: investment rather than trading for BPR
Indeed, in the area of grazing, a farm business can fall into investment or rental business which HMRC will disqualify from receiving the relief.
This is a subject which is being moulded by case law which sets out that where a grazing licence arrangement has been put in place, to avoid the loss of BPR, the landowner/farmer must still take responsibility for the maintenance and upkeep of the land itself, for instance, by spreading manure.
By the same token, where a farmer runs a livery yard the farmer must make sure that this is a functioning business where, for example, grooming services are provided. If the stable is simply being rented out and the rest is up to the horse owners themselves, it is very unlikely that the livery yard will qualify for BPR.
Overall, the reliefs available to farmers to avoid or reduce IHT are hugely valuable, although due to intense scrutiny from HMRC, it is essential that legal advice is taken at the earliest opportunity to ensure maximum benefit.