Protecting your family farm for future generations Posted: 6th December 2021
The North East is blessed with an abundance of landed estates and farming stock. Many landowners could be sitting on estates and associated property worth millions of pounds. However without careful planning, much of the value to beneficiaries could go in inheritance tax liabilities.
We’ve noticed a shift in farming families having discussions following the pandemic around how to pass on the family farm, and associated wealth in the most tax efficient way. Here we summarise some issues to consider and ways to mitigate inheritance tax though the use of Trusts.
Agricultural property relief and the conditions for it to apply
The most important inheritance tax reliefs are Agricultural Property Relief (known as APR) and Business Property Relief (known as BPR). You can pass on some agricultural property free of Inheritance Tax, either during your lifetime or as part of your will.
Agricultural property that qualifies for Agricultural Relief is land or pasture that is used to grow crops or to rear animals intensively including farm buildings, farm cottages and farmhouses.
With many landed estates being engaged primarily in farming, APR will help to reduce the inheritance tax liability in a lot of cases. But it is not a given. First, APR only relieves the agricultural value of the land. If an estate finds itself with land that is suitable for development and has increased in value accordingly, that extra value will not be relieved by APR.
There are also rules about how the land is used for agriculture. Land that is farmed in hand can have its agricultural value wholly relieved after two years of ownership, while land let to a third party for agricultural purposes will only be relieved after seven years.
Farmhouses need to be demonstrably farmhouses and farm cottages and buildings need to be occupied for the purposes of agriculture. It is not a straightforward relief and advice should always be sought if it is intended to be relied upon.
‘Character appropriate’ farmhouses and cottages
When looking at APR, it is important to define ‘farmhouse’. Although there is no legislative definition, broadly speaking it is a dwelling for the farmer and a place where the farming operations are conducted.
Buildings must be of a nature, size and ‘character appropriate’ to the farming activity that is taking place. The agricultural land in question must be the dominant feature, meaning that there has to be a link between the two.
The property is valued as if it could only be used for agricultural purposes. Any value over and above this ‘agricultural value’, such as the market price of a country residence, does not qualify for Agricultural Relief. In recent years, claims for APR on farmhouses have come under scrutiny by HMRC as house prices have risen and country farmhouses have become more attractive for wealthy non-farmers and overseas investors.
A cottage or farmhouse must be occupied by someone employed in farming or:
- a retired farm employee
- the spouse or civil partner of a deceased farm employee
They must occupy the property as either a:
- tenant under a lease granted as part of their former employment contract
- protected tenant with statutory rights
What about let properties?
Many landed estates include residential lets, often cottages no longer needed for farm workers. These properties do not benefit from APR, and normally owning and letting properties is treated as investment activity and not a business. However with careful planning and expert advice, it may be possible to demonstrate that the agricultural activity and the property letting activity form a single, entire business, the whole of which may benefit from Business Property Relief.
What is a discretionary trust?
A trust is a formal gift of money or property to individuals who act as trustees with guidance to hold and administer the assets for the benefit of a class of beneficiaries. It can be made in your lifetime or it can be created on death, within your Will. It is entirely a decision for your choice of trustees as to who benefits, when they benefit and to what extent. The beneficiaries have no right to anything within the trust and therefore the assets in the trust should not form part of their estate for inheritance tax purposes or the the purposes of any financial assessment. Click here for more information.
Creating a trust in life can be very useful for tax planning because it can significantly reduce the inheritance tax burden payable upon your death if you survive the gift into trust by 7 years. Trusts are also a wonderful vehicle for holding assets without losing control of them though you cannot benefit from them personally. Think of them as a box that you can put assets into – you can keep hold of the box so that you can continue to manage the contents,(though you can no longer benefit from the contents) but you can decide who takes what out of the box and when they take it.
Discretionary trusts give greater power to trustees to decide how and when to give funds to beneficiaries. This can be useful for estate planning, and save assets from being depleted unnecessarily. By setting up a Discretionary Trust, you are empowering your appointed Trustees to manage your Estate and decide at their discretion, how, when and who to distribute it to.
It’s just one example of a Trust that you can set up when making a will and it’s an effective flexible way of leaving assets to grandchildren or protecting family wealth for generations to come.
In summary, Trusts are a useful way to:
- Give away assets that are worth significantly more than they were when you acquired them – without paying the capital gains tax that would otherwise be due upon the gift.
- Give assets away and have them removed from your estate for inheritance tax purposes without losing control of the assets given.
- Hold assets on behalf of minors who are too young to take possession of them straight away.
How can EMG help?
We can help with inheritance tax mitigation using reliefs such as APR & BPR and setting up a Discretionary Trust. Our specialist team of Wills and Trusts Solicitors, led by director Samantha Edward, will advise you on your estate planning and whether a trust is the right solution for your needs and if so, the best type of trust to create. They work with a number of landed estates across the region and are also members of the Country Landowners Association to whom Samantha has given a technical update to on this topic.
Please contact Samantha Edward on 0191 500 6989 or at [email protected] to discuss protecting your family wealth for future generations.