Where There's A Will, There's A Way
The idea is simple enough. When we die we all want to pass on the full value of our estates to our families without paying taxes.
Unfortunately, these two objectives often conflict, bringing unexpected inheritance tax (IHT) liabilities or family frictions – sometimes both.
For farmers there are particular issues in IHT planning. If a farm cannot be passed on tax-efficiently, it may have to be sold to finance the IHT liability. Also, family members who do not want to be involved with the farm need to be considered?
There are basically two choices. The farmer can either pass on the business during his lifetime, or bequeath it on death through his will.
Lifetime gifts
If the farmer is a sole trader he can incorporate the business (i.e. trade through a company structure) and then gift shares in the company to his family. Alternatively, he can enter into a partnership with his family and transfer the business to the partnership.
Although either structure can be set up in a tax efficient manner care needs to be taken.
Gifts on death
Alternatively, the farm could be retained until death which may be the simplest solution. Also, if 100% Agricultural Property Relief (APR) is available, it could be the most tax efficient.
There are two possible ways of obtaining APR, which reduces the net value of property by either 50% or 100%. The first requires the property (i.e. land) to be occupied by the transferor for agricultural purposes in the two year period preceding death. The second requires the land to be both owned by the transferor and occupied for agricultural purposes throughout the seven year period preceding death.
To qualify for 100% APR on the farmhouse the following conditions must be satisfied:
- The property must be a farmhouse used for agricultural purposes;
- The land surrounding the farmhouse must be farmland; and
- The farmhouse is of a character appropriate to the surrounding agricultural property.
Her Majesty’s Revenue and Customs (HMRC) allows 100% APR on the agricultural value of a farmhouse where the landowner is taking a hands-on approach on the farm but not for owners who employ others to farm (i.e. the so-called lifestyle farmer). HMRC consider there is a 30% differential between agricultural and open-market value.
As far as will planning is concerned gifting the farm to a discretionary trust may be the answer. The trust does not take effect until death, can be administered tax efficiently and used as a resource for family members not involved in the running of the farm.
Contact Malcolm Emery for further information or advice.
Published 09/09/2008.
