Hidden Inheritance Tax pitfalls for farming businesses

It is dangerous to assume that 100% Agricultural Property Relief (APR) or Business Property Relief (BPR) will apply to every asset that is passed on in a modern farming business. There are many cases where HMRC has argued that part of a farming business is chargeable to Inheritance Tax (IHT).

The key to understanding this issue is to look at the differences between APR and BPR:

• APR can be due even though the land is not farmed by the landowner. To obtain BPR the property owner must be involved in the trading business.
• 100% APR can be due regardless of whether the asset is owned by the business or is held outside by an individual partner or shareholder. To obtain 100% BPR the land must be owned by the business.
• APR is only due on the agricultural value of an asset. Land or buildings with a potential non-agricultural use may not qualify for APR to their full value, though they can sometimes qualify for BPR instead.
• BPR is denied where a business consists wholly or mainly of holding investments.

It is the final point that has caused much uncertainty and has been the subject of dispute with HMRC in recent years. The following examples show how the conditions of the reliefs may be applied, however, every case needs to be considered individually.

Diversified farming businesses

When a business is receiving income from a range of non-farming activities, APR will not be available on the full value of the farm. If it can be shown that the business is predominantly a trading business then the whole property can qualify for BPR. This has been the subject of several tax tribunals and court cases and involves analysing a number of different factors including turnover, profit, asset value and management time.

Grassletting

To be a farmer (in the eyes of HMRC), the landowner must be seen to be carrying out husbandry on the land. If the grazier fertilises the land and sprays weeds, then it is the grazier not the landowner who is the farmer for tax purposes. Similarly, barter arrangements where the grazier pays for the fertiliser in exchange for a lower grazing rent should also be discouraged as it could result in loss of IHT reliefs.

Holiday cottages

HMRC has successfully denied BPR on most holiday cottages. There was an exception involving a business on the Scilly Isles where BPR was allowed, but caution needs to be exercised. The judge in this case commented that the property owners provided an exceptional level of service, but only just qualified for BPR.

Horse livery

In another case, a horse livery business successfully claimed BPR as it was able to show that it provided a range of services over and above the provision of a stable and grazing. However, other livery businesses, particularly those offering DIY livery, will find it difficult to convince HMRC that they are providing sufficient services to qualify for BPR.

Caravan parks

If a caravan park consists mainly of annual pitch fees, rather than from touring caravans or campers, then it could be considered an investment business. To obtain BPR it is necessary to show that a considerable range of other services are offered to visitors.

To any farming business, both APR and BPR can be extremely valuable when it comes to IHT planning, but the conditions that stipulate whether or not a property qualifies for the reliefs can be complex and are often based on case law.