When planning for later years and considering how to protect and preserve your wealth for future generations, it is important to be aware of the latest tax rules, how to mitigate tax and pass on your wealth effectively.
Tax relief for farmland owners
Succession planning for farming is complex and with farmers increasingly diversifying and considering renewables and lettings, there are tax implications to be made aware of. Upon your death, your Executor, will identify what taxes are to be paid on your estate.
Agricultural Property Relief (APR)
If the main activity on your land is farming, your Executors will first look to obtain Agricultural Property Relief. This can enable you to pass on some agricultural property to your family free of Inheritance Tax, and enable the farm to continue to operate.
However, APR will not cover property with ‘hope value’ (development potential), lettings or large woodlands. In these cases, your Executor should consider applying for Business Property Relief (BPR).
Business Property Relief (BPR)
If your estate is eligible, Business Property Relief can reduce the tax by either 50% or 100% on some of your estate’s business assets, which can be passed on as part of your will.
To apply for BPR, the assets must meet certain criteria and if all of the conditions are met, BPR can reduce tax on an asset to zero. But, if you let cottages, have furnished holiday lets, or run a caravan site on your farmland – your assets may fall under the exception of the Inheritance Tax Act and be classed as ‘investment activities’ and will be taxed at 40%. A portfolio of let properties used purely for rental or a caravan park quite often falls within this exception.
HMRC has frequently used the investment exception to challenge BPR claims on mixed businesses that include both farming and letting.
What practical steps can you take to reduce the risk of losing out on BPR?
Assess the importance of BPR to that business
Is APR likely to apply in any event? If not, what value is at stake?
Assess the likelihood of BPR loss
What are the chances of the investment exception applying? Carry out an analysis to assess the business
Gather evidence to support a mainly trading profile
Such as accurate records and financial accounts.
Separate investment assets from trading business
If the investment activities predominate, BPR will be lost on the whole business, including on the trading elements. In that case, consider anticipating this by managing the investment elements as a separate business to leave the remaining business with a mainly trading profile for BPR purposes. Then BPR might only be lost on the investment business.
Consider HMRC’s BPR clearance service
This provides written confirmation of HMRC’s view of the application of BPR to a specific business transaction or event. The application can be made before, or after, the transaction has occurred.
Overall, tax mitigation is all about planning. If you have a farm which has other commercial uses, speak to our advisors today to protect your assets against unnecessary tax bills later down the line.
For further information