Engaging with tax planning at an early stage, landowners can open up the availability of reliefs against Inheritance Tax (IHT).
In the words of Lady Bracknell: “What between the duties expected of one during one’s lifetime, and the duties exacted from one after one’s death, land has ceased to be either a profit or a pleasure.” (The Importance of Being Earnest, Oscar Wilde)
Whilst this sentiment may ring true at a time when making a profit from farming seems more challenging than ever, onerous death duties need not necessarily be the reality subject to careful planning. Engaging with tax planning at an early stage, landowners can open up the availability of reliefs against Inheritance Tax (IHT) and ensure that as much value as possible may be protected for the next generation.
This article focuses predominantly on the options available to landowners (including trusts which are subject to the ten year charge) where land is let on an Agricultural Holdings Act 1986 (AHA) tenancy. It will also touch on the benefits of introducing assets into a partnership as a means to qualify for Business Property Relief (BPR) together with Capital Gains Tax (CGT) implications. With tax, the devil is in the detail so, if this article raises questions in relation to your own tax planning, we would urge you to contact us in order to get bespoke advice.
Agricultural Property Relief (APR): what is it and when is it available?
As the name suggests, APR provides relief against the agricultural value of any gifts of agricultural property made by an individual during their lifetime or on their death, for the purpose of calculating IHT. APR will not be effective against any non-agricultural value e.g. if the land has the benefit of planning permission, has mineral value or would attract higher bids from ‘lifestyle buyers’.
For APR to apply, the following conditions must be met (this is not a definitive list as other factors will be relevant in certain circumstances).
- The property is agricultural in nature - ‘agriculture’ is not defined in the Inheritance Tax Act 1984, although HMRC has issued guidance on the matter (to include the cultivation/production of food, rearing of livestock, set aside etc.) but woodland on its own does not qualify.
- The property must have been occupied by the donor for the purpose of agriculture throughout the two years before the date of any lifetime gift or the donor’s death OR owned by the donor for seven years before the date of any lifetime gift or the donor’s death and occupied throughout that seven year period for the purpose of agriculture.
In most cases APR will be available at 100% against the agricultural value, but in some cases only 50% relief can be claimed.
Agricultural land let before 1 September 1995 will, unless certain conditions relating to land owned pre 10 March 1981 are fulfilled, only qualify for 50% APR against IHT, compared with 100% APR which is available on land subject to a tenancy dated 1 September 1995 onwards. In the context of buoyant land values, qualifying for 100% APR may prove extremely valuable. By way of an example a 300 acre farm subject to a pre-1 September 1995 tenancy might attract a tax liability of £360,000 (assuming nil rate band utilised elsewhere and land value of £6,000 per acre subject to tenancy) as opposed to nil if the land qualified for 100% APR.
Since the Tenancy Reform Industry Group (TRIG) Reforms in 2006, with careful planning and agreement between landlord and tenant, it is possible to create a position whereby the landlord is able to qualify for 100% APR in respect of the holding and the tenant may still maintain the benefits of a tenancy governed by the AHA - including rights of succession. This is achieved by the grant of a new tenancy under which the parties elect to be governed by the provisions of the AHA.
The new tenancy will be essentially on the same terms as the existing tenancy so the tenant need not fear that they are giving up the protection of the old AHA regime.
Implications for Capital Gains Tax (CGT)
On the surrender and re-grant of a tenancy a liability to CGT may arise as the disposal of the tenancy by the tenant will be a disposal for CGT purposes. The value of the new lease is taken into account as consideration for the termination of the old lease. HMRC has, however, granted a concession meaning that no CGT will be payable on the re-grant of a tenancy between the same parties and for a longer term before its expiry when the following conditions are met:
- the transaction is made on ‘arm’s length’ terms
- the surrender and re-grant of the tenancy is not part of (or connected with) a larger scheme or series of transactions
- no capital sum is received by the tenant (i.e. money paid for allowing the surrender)
- the extent of the holding under the new tenancy does not differ in any way from the holding under the old tenancy
- other than the duration of the term and the amount of rent, the terms under the new tenancy do not differ from those under the old tenancy. (Trivial differences will be ignored).
Implications for Stamp Duty Land Tax (SDLT)
The grant of the new tenancy will be one which is potentially subject to SDLT and so depending on the rent payable, this should be considered and a refund submitted within 30 days of the completion of the new tenancy.
When reliefs are claimed one must expect HMRC to show an interest and, indeed, they will question the details of any claim. It is vital, therefore, to be prepared and for all arrangements to be properly documented.
There are a number of additional matters which should also be assessed which are beyond the scope of this article. These include the availability of relief against the farmhouse, possible gifts with reservation, planning between spouses, the use of trusts and interconnection with other tax reliefs perhaps most importantly including Business Property Relief.
Whilst there is a cost to restructuring current arrangements, in most cases, the expense of planning ahead will be far outweighed by the benefits of the ultimate tax relief that can be achieved.