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Are farms subject to inheritance tax?

Oct 14, 2022 | Uncategorised

Are farms subject to inheritance tax? The short answer is yes – but some assets may be eligible for Agricultural Relief. In this article, we’ll break down what does and does not qualify for this relief.

First, a word on Inheritance Tax (IHT). When someone dies, their estate can be subject to IHT if it’s valued at over £325,000. Any estate valued below this is considered to be in the “nil rate band”. By “estate” we mean a person’s property, money and possessions.

The usual rate of Inheritance Tax is 40% – and, as with Income Tax, it applies only to that part of the estate which is above the threshold.

However, there are some exemptions. Some agricultural property can be left in your will without being taxed. This relief can be up to 100% on farms, farmhouses and other agricultural assets.

The taxman has a lot of questions to ask before granting Agricultural Relief to a farm. It’s a complex issue that requires a thorough knowledge of legislation and case law.

Because of this, it’s worth seeking legal advice to find out whether your agricultural assets qualify for Agricultural Relief.

Before we go any further, it’s important to note that these rules apply to agricultural property in the UK, Channel Islands, Isle of Man and EEA.

What property qualifies for Agricultural Relief?

First of all, for property to qualify for Agricultural Relief it must be land or pasture that constitutes part of a working farm – “working” being the operative word. There are some cases where farmers who have stepped back from active involvement in the farm have not been deemed eligible.

You don’t need to own a property for it to qualify – it can be let. But it must be used for growing crops or animal rearing. That means derelict buildings and unused land don’t count.

Qualifying properties include:

  • Crop fields.
  • Stud farms.
  • Land used for short rotation coppice.
  • Farm buildings, cottages and farmhouses.
  • Some company shares and securities. These can qualify if they gave the deceased a controlling share of the company at the time of their death.
  • Land that isn’t currently being farmed under either a crop rotation scheme or the Habitat Scheme.

You’ll notice that this doesn’t cover crops or livestock – nor does it include equipment or machinery.

There are also some restrictions based on the length of time the property has been owned or occupied – and this ownership or occupation has to relate to agriculture. Property only qualifies for Agricultural Relief if it’s been occupied by the owner, their company or their spouse or civil partner for two years – or seven years by somebody else.

How is the farm valued?

The value of a farm will include land, buildings, houses, machinery, crops and livestock. As we’ve seen, not all of these things qualify for Agricultural Relief, but they all form part of the farm’s overall value.

Are there criteria for farmhouses and cottages?

The government guidelines say that buildings “must be of a nature and size appropriate to the farming activity that is taking place” and that “the property is valued as if it could only be used for agricultural purposes”. It has to be occupied by a farmer, retired farm employee or their surviving spouse or civil partner.

This means that the cottage or farmhouse is valued as an agricultural building and not, say, at the market price for a house of its type in the countryside. It also means that if a cottage has been let and is no longer part of the farm’s agricultural activities, it won’t qualify.

HMRC will also consider factors such as the amount of adjoining land that has been farmed, the size of the farmhouse, the amount of time spent farming and where the building is located.

The building also has to be occupied by a farmer, retired farm employee or their surviving spouse or civil partner.

What if some parts of the estate aren’t used for agricultural purposes?

This is a tricky one. There can be complications when land is let for non-agricultural purposes, or where a farmer diversifies – turning land into a campsite, for instance, or a quad bike track. In these cases, the land may qualify for Business Relief rather than Agricultural Relief specifically.

What are the rates of Agricultural Relief?

In some situations, Agricultural Relief is due at 100%. These are:

  • If the landowner also farmed the land.
  • If the land was being used on a short-term grazing licence by someone other than the landowner.
  • If the land was let on a tenancy that started on or after 1 September 1995.

Other criteria apply to properties owned before 10 March 1981.

In all other cases, relief is due at 50%.

Any outstanding mortgage payments have to be subtracted before arriving at the rate of Agricultural Relief.

How about property received by transfer?

For property that was acquired through a transfer, there are certain conditions to be met.

First, the property must have been eligible for Agricultural Relief when it was first transferred.

Secondly, it must have functioned as a farm building and have been occupied by the person who made the transfer.

Thirdly, it should meet criteria other than those relating to ownership and occupation.

If I qualify for Agricultural Relief, do I also qualify for Business Relief?

If you’ve claimed Agricultural Relief on an asset, it can’t also qualify for Business Relief.

In some cases, an asset that doesn’t qualify for Agricultural Relief can qualify for Business Relief instead. One example of this would be if the land in question is used for non-agricultural ventures like sports or market trading.

At Milners, you can find agriculture solicitors you can trust – and we’re experts in wills, trusts and probate too. We pride ourselves on being straight-talking with the ability to make complex law simple. So if you need expert tailored advice relating to your farm, get in touch today to book your free initial consultation.

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