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Article date: 03/11/2014
As Britain begins the countdown to a general election, the various political parties are starting to look at ways of balancing their budgets, funding 'popular' tax cuts through increases in taxation from other sources.
One of the areas ripe for reform is agricultural property relief (APR) from inheritance tax (IHT).
As a result, says Peter Gosling of West Midlands law firm Higgs & Sons, careful and considered estate planning should be at the forefront of every farmer's mind.
The reform of APR has been on the political agenda since the establishment of the Office for Tax Simplification (OTS) in 2010.
Uniquely in farming and agricultural businesses (unlike other owner-managed businesses) both the land and buildings are the source of business profits - while at the same time they may also be the home of the farmer. In many cases the land and buildings will have been in the family for generations. APR historically recognises that farming is a long-term, low-return, high-capital business; it is meant to ensure that the business of farming is not disrupted following a death by selling off vital assets to pay the IHT bill.
Peter says: "As the law currently stands up to 100% relief from IHT is provided in the form of APR on the agricultural value of the land and buildings, including cottages and farmhouses.
"With the correct structuring of the farm and agricultural business anything not covered by APR will be dealt with by Business Property Relief (BPR). BPR at 100% can go a long way to protect the rest. Consequently APR and BPR provide an attractive opportunity for wealthy individuals to purchase a smart farmhouse and a few hundred acres as an investment to shelter their wealth from HMRC."
Figures released by the National Audit Office in March 2014 show that in the tax year 2012-13 IHT raised £3.1billion for HMRC. However, unlike most other taxes the amount of relief far exceeds the amount of tax collected. Several reliefs (including APR and BPR) define the scope of the tax and the value of these in 2012-13 was £22.4 billion - seven times the value of tax collected.
The value of both reliefs has increased by more than 50% in the last five years.
Peter continues: "The government has already started to challenge what it sees as IHT avoidance using the purchase of agricultural property. The Finance Act 2013 stopped an exploitation of the rules that had allowed debts to reduce the value of an estate regardless of whether the debt was paid after death. Some arrangements involved loans to buy agricultural land that qualified for APR, so that the taxable value of the estate was reduced twice. Other arrangements involved contrived debts that were not repaid so there was no real reduction in the value of the estate.
"APR therefore looks vulnerable to further change; what was intended to protect hard working farmers has become, in some cases, a haven for the wealthy.
"It means that APR becomes the political target of politicians keen to stop a tax relief perceived to be open to abuse by the rich. Ending or reforming APR could raise £0.5 billion for HMRC in additional IHT each year but will not affect anyone outside the farming community, so is thought to be a vote winner."
Peter urges farmers to act now.
"Now is a good time to put your succession plans in order. To minimise IHT and maximise APR you should make sure that your farm and agricultural business structure is properly documented and reviewed.
"If you have diversified so that you have non-agricultural use of land and buildings APR will no longer be available on those assets, but BPR may be; to get maximum relief it is vital that the non-agricultural business is properly structured. Don't let buildings stand empty, use them for storage.
"You should keep actively involved with the farm and agricultural business. APR requires farmers to remain 'active farmers' so you may miss out on APR if you are deemed to be no longer an active farmer and not demonstrably involved in decisions around running the farm and agricultural business. Make written notes of all your discussions; these notes are evidence for HMRC of your involvement in the running of the farm."
For further advice on APR, BPR or structuring your farm and agricultural business contact Peter Gosling, Head of Rural Services at Higgs & Sons on 0845 111 5050.