As demand for building and development on farms grows we consider the importance of planning ownership to obtain full rate relief
Diversifications on farms is increasing and with these changes there are implications for tax. Farmland ordinarily benefits from agricultural property relief on its agricultural value for inheritance tax but, with the demand for building and development, farmers should review how farmland is owned so that any hope or development value benefits from business property relief.
Farmland can be farmed by a farming partnership (1) as separate property owned by one or more partners who allow the partnership to farm it, (2) owned by the partnership as general capital or (3) owned by the partnership with the capital value allocated to land capital accounts.
In farming family partnerships, comprising parents and one or more children, it is common for the farmhouse and farmland to be owned by parents, outside the partnership, and not by the children. For a variety of reasons, the parents are often unwilling to transfer a share of the farm too soon. In due course the farmland is transferred to the children either in lifetime or, more often, on death, the latter having the advantage of the free uplift for capital gains tax. However, as the farmland is owned outside the partnership no relief is obtained for any hope or development value.
If hope or development value is an issue, one solution may be for ownership of the farmland to be changed so that it becomes a partnership asset with the capital value of the farmland being protected through land capital accounts. With land capital accounts the original owners retain credit for the capital value of the land.
All the partnership documents need to be consistent and the partnership deed, the title to the property and the partnership accounts will need updating, clearly recording the farmland as partnership property. The partnership deed and accounts will record the detail of the land capital accounts.
If land is held as partnership property, the legal nature of the asset changes and it is important to consider the impact on Wills. If farmland has been specifically gifted, Wills will need updating to refer a partnership share or value of the land capital account.
For those fortunate to have hope or development value, good planning to obtain full relief is invaluable.