Many farming families assume that their farm will pass from generation to generation. However farmers can be notoriously bad at succession planning, shying away from handing the reins to younger members of the family. Irrespective of whether decision making and control are transferred, there are a number of steps, which must be taken by a land and/or business owner, during their lifetime, if tax reliefs are to be available to mitigate inheritance tax on their death.
Agricultural Property Relief (APR) is a relief which allows up to 100% of the value of agricultural land or property to fall free from inheritance tax (IHT) on death. Or in the alternative, the value of the farm business may be eligible for Business Property Relief up to 100%.
When dealing with an agricultural property or land on death, there are items of proof which HMRC needs to see in order to be convinced that APR should apply. Farmers should consider this simple but vital checklist to enable their chosen executors to utilise this valuable exemption from IHT on death:
It is important that a Will is written in its most flexible form in order to:
The Law Society recommends that a person’s Will should be reviewed every five years in any event.
Without written evidence of an agricultural tenancy or grazing agreement HMRC are likely to question the validity of the claim to APR. In a recent case we handled there were no written agreements in place, therefore the executors were forced to cast around for people, local to the farm and land, to make witness statements supporting the claim for APR. As to be expected HRMC do not look favourably on this form of evidence and would always prefer to see a tenancy or agreement signed by the farmer during their lifetime.
Equally, most farmers would not want their executors and family to go knocking on the doors of neighbours asking them if they would be willing to swear a witness statement to support the family’s claim to APR; or put their neighbours to the trouble of making these statements. To avoid this unnecessary and expensive work it is worth a farmer taking the time to put these written agreements in place during their life time and keeping a good record of them.
Farming companies or partnerships should have an appropriate partnership or shareholders’ agreement in place. This should be reviewed regularly to ensure it reflects the current position. A farmer should also ensure it actually does what he expects it to following his death; does the partnership or shareholders’ agreement work in tandem with his Will?
We have seen unfortunate cases in which on a person’s death an asset has been transferred to a person, who the deceased never intended should receive it. An asset and its recipient may be named in the Will, however, if the deceased did not actually own the asset, the gift in the Will cannot take effect.
The importance of commercial and private client advisers working together with the farmer is underlined in these circumstances. Too often the partnership agreement is old and stale. A fresh review would not go amiss. This applies equally to a shareholders’ agreement and the associated cross life policies which may be relevant.
Whenever new tenancies are put in place copies of any historic written tenancies or other written agricultural agreements should be kept to provide evidence of historic continued agricultural use up to the date of death. HMRC are also very interested in the continued receipt from the Rural Payments Agency and associated agencies. Without this housekeeping exercise on the points set out above the executors will have a hard task providing the evidence HRMC will demand to validate the claim to APR.
HMRC rely on the executors’ personal responsibility to make a valid claim. Without that evidence HRMC are increasingly suspicious the executors are making a spurious claim and may consider the executors personally liable by levying a penalty on them.
The executors’ usual, and what would appear to be quite reasonable response, to the HMRC enquiries is that they relied on their or the farmer’s professional advisers. However, in two recent cases HMRC have rejected this approach and insisted it is the executors’ personal responsibility to ensure that the claim to APR is valid.
Without putting in place the appropriate documents during his lifetime, a farmer is placing a serious personal burden on his chosen executors. The executors are unlikely to be aware of this risk. If they were aware that a farmer had failed to put in place simple precautions, the executors might just decline to act.
Inheritance tax reliefs can be of critical importance to the survival of the business when a farm is passed from generation to generation. Taking advice from professionals and putting in place straightforward written documentation is a small price to pay to avoid extensive and expensive dialogue with HMRC or even the loss of critical tax savings, as well as reducing the executors’ exposure to personal liability.