Diversification and Inheritance Tax

Both locally and nationally, many farms have diversified to provide additional income streams - and some farmers now run several diversified businesses on former agricultural land, such as holiday lets and solar farms.

Although this extra income may be vital and diversifying may be the only way to secure the family business can continue, an unintended consequence can be the loss of Inheritance Tax reliefs available.

Laura Schofield, Wills & Probate Solicitor with Ware & Kay and Pearsons & Ward, considers this.

Inheritance tax – the basics

Inheritance Tax is a tax on the estate of someone who has died.

The rate is 40% on the amount above the ‘nil rate band’ which depends on the individual concerned and the assets – from £325,000 to £500,000 per person, or up to £1,000,000 per couple depending on the size of the estate.

Example

Bob has never married and has no children. When he dies, his estate is worth £1,500,000.

£1,500,000 less £325,000 = £1,175,000

subject to IHT @ 40% = £470,000 tax to pay

For farmers, there are other reliefs and exemptions that can, with careful planning, be used during lifetime or in a Will to reduce Inheritance Tax – particularly Agricultural Property Relief and Business Property Relief.

Agricultural Property Relief

100% Agricultural Property Relief (APR) from Inheritance Tax can be claimed on land, the farmhouse, farm buildings etc, subject to satisfying HMRC requirements including occupation for agricultural purposes and minimum ownership conditions.

APR applies only to the agricultural value of the land, which may be lower than its open market value. So, changing land from agricultural to non-agricultural use risks the loss of APR.

Business Property Relief

Business Property Relief (BPR) is an exemption from Inheritance Tax on business property – including sole traders, partnerships, and land used in a business that the individual was a partner in or controlled. BPR applies to the open market value and may be given at 50% or 100% depending on the circumstances. As with APR, HMRC requirements must be satisfied.

Diversifying

Usually APR is the starting point for farming enterprises. However BPR can be used to fill the gap between the agricultural value of land (which qualifies for APR) and the open market value of the land (for BPR).

BPR is not simply available on all business types – businesses that consist mainly or wholly of ‘investments’ will not qualify for BPR.

Letting out former farm buildings as storage, workshops or offices is likely to be treated as an investment and so BPR would be lost. Holiday lets are a complex area, and the level of services provided determines whether or not the business will be treated as a trading business or an investment, and in turn whether or not BPR will be available.

What next?

Diversifying may well be the answer to your income and planning needs – but careful consideration must be given when planning to ensure that advice given in regards to one tax does not adversely impact on another. There are various ways of mitigating potential Inheritance Tax liabilities, such as taking out an insurance policy to cover the future Inheritance Tax or making gifts during lifetime. Expert advice should always be taken on your individual circumstances.

Contact Laura Schofield at Ware & Kay and Pearsons & Ward on Malton 01653 692247 or email laura.schofield@pearslaw.co.uk.