Inheritance Tax and Farming Advice

Lisa Oliver - Associate Director

Inheritance Tax

Inheritance Tax (IHT) is a tax on the value of an estate of someone who has died. The rate of IHT is currently 40%. However, there are reliefs available to reduce the value of the taxable estate. When you die you can pass on assets up to the value of your Nil Rate Band (NRB) of £325,000 without there being any IHT tax payable.

The Government introduced the Residence Nil Rate Band (RNRB) in 2017 as an additional amount that could be passed on tax-free against the value of the family home. This rose to £175,000 in April 2020.

To use the RNRB you must pass your main residence on to direct descendants such as children or grandchildren, but not nieces or nephews. The RNRB will be reduced by £1 for every £2 that your estate exceeds £2,000,000 (this is before any IHT reliefs or exemptions are claimed).

If there are any thresholds that have not been fully utilised when the first person in a marriage or civil partnership dies, the unused part can be transferred to the surviving husband, wife or civil partner when they die.

This means married couples, or registered civil partners whose combined estate is worth less than £2,000,000, can have a taxable estate worth up to £1,000,000 (being £325k x 2 plus £175k x 2) before any IHT will be payable, provided they leave their main residence to direct descendants.

Agricultural Property Relief

Agricultural property that qualifies for Agricultural Property Relief (APR) can be passed on in your will free of IHT. In order for the land and agricultural property to qualify for APR then the land and property must have been owned for:

  • 2 years if farmed by yourself
  • 7 years if farmed by someone else

Provided the farmhouse is deemed to be character appropriate for the land farmed around it, then the farmhouse should qualify for APR too.

Business Property Relief

Business Property Relief (BPR) is a relief from IHT and reduces the value of business assets when calculating the IHT position of an individual.

While APR provides relief for the agricultural value, BPR will provide relief for any value over and above agricultural value, for example development land.

Where the conditions for BPR are met, the relief reduces the IHT estate at either 50% or 100%. The rate of relief applicable will depend upon the type of the property and how it is owned.

Some things to watch out for:

  • Is the land presented on the farm balance sheet?

APR should apply to the agricultural value of the land whether it is presented on the balance sheet or not.  Although if the land has any value over and above agricultural value, for example development potential, then in order to qualify for 100% BPR the land will need to be included on the balance sheet for a minimum of two years. If the land is not included on the balance sheet then BPR would be restricted to only 50%. When meeting with your accountant it is important to discuss the value of the land and how it is recorded on the farm balance sheet.

  • Letting the farm out on a Farm Business Tenancy (FBT)

Letting out the farm on an FBT may seem like a good idea when farmers are looking to scale down their activities. Provided the tenant continues to the farm the land, and the land has been owned for seven years or more, then APR should still be available. Although, as the owner of the land is no longer farming the land themselves, there are IHT implications that need considering:

  1. BPR would no longer be available on the land, therefore any development value would be exposed to IHT.
  2. APR will not be available on the farmhouse, as the farmhouse is no longer the base of the farming operations.

Letting land out on an FBT also has VAT and income tax implications. Careful consideration must be given before letting farmland out on an FBT, and discussing this with your accountant before the decision is made is important.

  • Diversification

Farm diversification is becoming increasingly attractive to farmers wanting to generate another form of income. It is important to be aware that diversification activities such as renewable energy, glamping sites, converting farm buildings to let properties or furnished holiday lets, can impact your IHT position and mean a loss of APR. While BPR may be available on some projects, others could be viewed as investment activities and therefore limit the potential for a BPR claim.

Let’s Talk

It is always worth chatting any diversification projects through with your accountants to ensure the impact on IHT is minimised and the correct structure implemented. If you would like to discuss any of the above with us here at LHP, please contact us on Let’s Talk.

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