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THE PERILS OF IHT WHEN PASSING ON YOUR FARM Ashley Partridge, Head of Wills, Probate and Estate Planning with Parker Bullen, talks about some of the issues around inheritance tax.
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As all farmers know, farms tend to be family businesses and, as such, are passed down the generations, sometimes for centuries. It means passing on a business to the next generation is par for the course for many farming families. The evolution of tax laws, though, means passing on the family farm is perhaps not as simple as it once was. Death duties can be traced back to 1694, with inheritance tax (IHT) famously used in 1796 to fund the war against Napoleon, while IHT in its modern form dates back to 1986. Generally speaking, though, most farms are not liable for IHT, as if the farm is trading or used for agricultural purposes when it is passed on – which it most likely is – it becomes exempt. The same is true for many businesses. However,
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properties and other assets not used for agricultural purposes are liable for IHT. Because of this, families often get caught out, not realising they can leave IHT unfairly distributed amongst their offspring. This is especially true where a farm has diversified into other forms of businesses which may, or may not, qualify for agricultural property relief (APR) or business property relief (BPR). If, for example, you leave your farm to one child and rental properties or other assets to another, the child inheriting the farm will pay little or no IHT whereas your other child could be hit by the tax. So how can a family ensure IHT liabilities are spread evenly when a farming business is passed from parent to child? Often three generations can work on the farm at one time, so it’s not unusual for the farm to be passed to those children that have been more involved in the farm than others, with the remainder of the estate left to their siblings. Even if finances are tight, a farm can be worth a significant sum, meaning that those who inherit the farm often inherit substantially more – financially speaking – than those who don’t. If the farm is gifted by your Will free of tax, this imbalance can become more pronounced, as the children who inherit the IHT taxable share of the estate are also liable for any IHT due on the farm. This could mean that these children not only inherit a smaller amount, but that amount becomes smaller still once they’ve paid IHT. A farming estate is rarely entirely tax-free, especially for those that have diversified into property letting, holiday lets or any other land uses that don’t qualify for APR or BPR. The application of APR and BPR can be complex, plus there may be restrictions on the value of the farmhouse as well as the ‘hope value’ of any land with potential for planning permission – all of which can affect whether you qualify for tax relief and/or the level of relief for which you qualify. Consequently, many families find themselves facing an unexpected tax bill. When making plans for your farm it’s therefore crucial to consider IHT carefully. Many choose to establish a discretionary trust in their Will, under which chosen trustees manage the estate and assets after the owner’s death. Trustees decide who ultimately gets what and can be guided by a detailed ‘letter of wishes’, which is less legally restrictive than a typical Will. It can also let trustees divide an estate in terms of the owner’s overall intention, rather than through the ‘letter’ of the Will – which could be out of date and not reflect the latest changes to IHT. Alternatively, you can make specific bequests in your Will, although you need to review your will and IHT positions regularly to ensure they’re up to date and relevant. The contents must continually reflect your intentions regarding how you’d like your assets split. Estate planning can seem complex, but taking time to plan now can ensure your children are treated fairly and your assets distributed in the way you would like. Smooth transition of the business between generations is the ultimate reward for all the hard work you have put in.
