If you ask most people for their top five annoyances in life, tax will usually be up there. If you ask them for something that really annoys them about tax, you will usually find that inheritance tax is a particular grievance.

The argument I mainly hear is that a client has worked hard their whole life and paid tax, only to be taxed again when they move from this Earth.

With the 2014/2015 inheritance tax exemption totalling £325,000/person, a significant number of farming families could be affected.

The good news is that agricultural property relief is available, which could, if correctly planned, mean that no inheritance tax is due for assets that fall within this definition.

The basic position

The basic definition that the taxman gives in respect of eligible agricultural property is as follows:

  • Farmhouses, cottages or buildings in character with the property.
  • Woodlands or buildings used for the extensive rearing of livestock (or fish).
  • Growing crops (when transferred with the land).
  • Stud farms engaged in the rearing or breeding of horses and land being used for grazing associated with those activities.
  • Land and buildings used in the cultivation of short rotation coppice, for transfers on or after 6 April 1995.
  • Any land with a habitat scheme for transfers on or after 26 November 1996.
  • Pitfalls

    Most farmers reading this will probably now relax as this sounds like pretty much everything is included. Unfortunately, this may not be the case and there are a number of key pitfalls.

    Conacre

    Historically, land let in conacre has been accepted as agricultural property.

    Recent activity by HMRC has meant that it is vital now to ensure that any conacre agreement is properly documented and can stand up to scrutiny by the tax authorities.

    The farmhouse

    Another classic revenue attack is the farmhouse on the land. While we see above that a farmhouse that is in character with the property is exempt, one that is held not to be in character will be fully taxable.

    When considering this, the Revenue may take into consideration the size the house, the size of the farm, how much of the farm is owned by the deceased and how much has already been gifted to children.

    Although the Revenue lost a case at tribunal in 2013 with regard to the farmhouse and the gifting of land to children, it should be noted as an area where careful planning is required.

    Land value

    Although development land values have not been an area of particular concern in recent years, this can attract significant inheritance tax even when the land is farmed.

    An example would be where a farm has been left to children with the land valued on an agricultural basis at £10,000/acre.

    If agricultural relief applies, this may be fully exempt. However, the Revenue has successfully managed to claim that tax may be payable where the development value of the land exceeds the value for agricultural use.

    If in our example the land had a development value of £100,000/acre, then £90,000/acre may be subject to inheritance tax.

    Conclusion

    The farming community does not get an automatic bye ball when it comes to inheritance tax and can, if not careful, be subject to significant tax bills. But with timely planning you can mitigate, if not completely remove, any tax payments on death. I have not covered all areas of concern within inheritance tax and agricultural property relief and you should take appropriate professional advice before making any decisions.

    *Richard Gray is a chartered account, a licensed insolvency practitioner and a partner in a private practice with a number of farming clients. He can be contacted on 028-90788856 or emailed on richard@pgraccountants.com