Many farmers are asset rich but income poor. Despite farm incomes improving over the last four years, input prices such as animal feeds have been rising, so without the Single Payment Scheme many farms would not be profitable. At the same time, agricultural land prices are at record highs both in real and nominal terms. When you add in the value of the farmhouse and agricultural buildings, even the smaller farms of around 100 acres can be worth a seven figure sum. It follows that it is more important than ever for farmers to consider their estate planning.
Inheritance tax is levied at 40% on estates worth over £325,000 although this figure can double if there is a transferable allowance from a spouse or civil partner. However, most farmers would face a sizeable bill if it were not for the benefit of Agricultural Property Relief (APR).
The idea behind APR is to prevent a forced sale of the farm as a result of the tax burden upon death. Relief is at 100% where the farmer had the right to vacant possession or the right to obtain it within 24 months or the land was let after 1st September 1995. In other cases the reduction in tax is 50%.
100% APR is therefore available in the following circumstances:
However, what about the farmhouse? One of the unique points of APR is the ability to include the farmhouse provided certain conditions are met. Basically, the farmhouse must be used for agricultural purposes and be of a character appropriate to the holding of which it forms part. So APR is limited to the agricultural value and will not be available on the mansion house with just a few acres. You apply the Elephant Test. You know a farmhouse when you see one.
Planning law is in the news at the moment and it may be that many farms have some development potential, adding further to the value of an estate. This ‘hope value’ is the difference between market value and agricultural value and APR applies only to the agricultural value.
Given the generous tax reliefs currently available now is a good time to consider passing farms to the next generation but should you favour the farming child or treat all children equally? This is a topic for another article but one thing is for sure – you need expert advice.
William Kinread is a partner at Raworths LLP and a solicitor specialising in agriculture, wills, trusts and probate. To contact Raworths telephone 01423 566666 or visit our offices at Eton House, 89 Station Parade, Harrogate, HG1 1HF. Alternatively, you can email firstname.lastname@example.org.