Agricultural Estate Planning
The starting point when looking at estate planning where agricultural land is concerned is to look at the current set up of the farming partnership and various pieces of land. More often than not with agricultural land it is not certain who owns the land, or it is possible that where land has been passed from generation to generation that it may not have been officially transferred. This makes it very difficult when the current owner dies to establish which pieces of land forms part of their estate and therefore who it should pass to.
It is important that you deal with any land that has not been adequately transferred immediately. It is increasingly difficult to do so after you have died and it may cost a lot more money trying to retrace the various estates of old owners of the land to establish a route of title that you would have had knowledge of and would have been able to deal with more easily had you still been living.
Once it is clear who owns the land you can then look to see whether the assets will attract any reliefs on your death. The most common of these for agricultural assets is agricultural property relief (APR). APR is a relief that reduces the value of certain agricultural assets for IHT purposes and there are two rates of relief; 50% and 100%. Some assets will qualify for 100% relief and this includes any land that is owned and farmed by you personally or any land that is subject to a Farm Business Tenancy (post September 1995). If there is an Agricultural Holdings Act Tenancy over the land then you will only qualify for APR at a rate of 50%.
It is important to note that not all assets will attract relief and your estate may then become liable for inheritance tax that you weren’t expecting. An example of this might be where you have a farmhouse and some land that is farmed with the farmhouse. Usually this would attract APR. If you were to then gift the majority of the land keeping only a small acreage HMRC may take the view that the house is no longer character appropriate as a farmhouse and therefore will not qualify for APR.
There are some time limits that must be considered when determining whether an application for APR would be accepted. If you own land and it is used for agricultural purposes then you must have owned and farmed it for two years to qualify. If the property was occupied by someone else for agricultural purposes prior to you owning the land then it must have been owned and farmed for 7 years to qualify. This is of particular importance when you consider lifetime gifts of assets that would usually qualify for APR.
If you make a gift during your lifetime, then the value will still be considered as part of your estate for IHT purposes for a period of 7 years from the date of the gift. If you survive for 7 years then the value of the gift is no longer considered. If you, therefore, gift agricultural land then the value of the land could potentially be considered for IHT purposes if you fail to survive for 7 years. You may think that you will be able to utilise APR on this gift and therefore bring the value of the land down to £0 but in order to do so, the land must be kept and farmed by the new owner for the 7 year period otherwise the APR will be lost and the full value of the land will be considered when working out your IHT liability.
If you are thinking about obtaining mortgages or loans that will charge against your property, then it is worth considering charging a property that would not qualify for APR. This would then mean that on your death the value of the mortgage would be deducted from the value of the property on your death before inheritance tax would be considered. In reality this means that you can deduct both the value of the mortgage and the full value of the APR from your estate before determining what IHT your estate will have to pay if the mortgage is over a property that does not attract APR.
For further information please contact a member of our Private Client team.