Agricultural Property Relief under the spotlight
As if hard worked and financially stretched farmers didn’t have enough on their plate, there’s now growing concern over Agricultural Property Relief (APR). APR is the relief from inheritance tax that farmers’ successors qualify for if their farmhouse played an integral part in the farm business. A valuable relief, and in some ways a reward for farmers and their families, this relief is being challenged with growing frequency by HM Revenue & Customs (HMRC). In an attempt to increase tax income, HMRC is attempting to plug the national deficit by challenging reliefs like APR at what seems like every opportunity.
There is evidence to suggest that more and more farmers might face the loss of this valuable relief and as a result, the APR waters are becoming somewhat muddied. Farmers who stop work before death, or in some instances choose to work only on a part time basis are amongst those who seem to be particularly attracting the spotlight when it comes to APR challenges. Recent tribunals include a case whereby an elderly farmer, in ill health, was forced to move to a care home to see out his final years.
In this instance, it was concluded that APR on the farmer’s property would be denied because the farmer had not occupied the farmhouse for agricultural business purposes at his date of death. This judgement seems particularly harsh on two counts. First, on the basis that it was made against a backdrop of ill health forcing the farmer to leave his home and it appears to pay no regard to the fact that the farmer had lived in the farmhouse and worked on the farm for decades beforehand. Worryingly, these cases are becoming more and more common.
The retirement reality
The practical side of farm work is such, that as farmers become older, they have a tendency, thanks to the physical nature of the work, to need to withdraw from full time, hands on farming. In most cases however, these farmers remain resident in the farmhouse, which is, in most instances, one of the most valuable assets of the business. In these cases, HMRC appear to be having a bit of a field day challenging the application of APR on the basis that the property was no longer the hub of the running of the farm business. In cases were HMRC’s APR challenges are successful, the farmhouse subsequently attracts inheritance tax as a business asset on passage to the farmer’s successor. As you can imagine, in many of these cases, this is catastrophic for the business and the successors, particularly since the situation was unforeseen and unplanned for.
What can be done?
Thanks to the muddying of the APR waters, there are more and more people lobbying for a reform to the system. In order for farmers and their families to be able to plan with any confidence, there needs to be complete clarity on when APR will be allowed and when it won’t. It is only through such reforms and such transparency that British farms will continue to be able to be passed down from generation to generation as they have been for centuries.
What can you do?
If you want to plan for your retirement with certainty, all isn’t lost. With careful, structured planning, you can retire without inadvertently creating a huge inheritance tax bill for your successors. The important thing about this sort of planning however is that it must take place during your lifetime to be effective. Because the majority of farms in the UK are set up as family businesses or partnerships, there is the opportunity to pass ownership to your successor or successors during your lifetime. By doing this in the correct way, with the correct structure behind it, you will be protecting the right to APR at the same time as deferring any capital gains tax liability.
Like all things tax and tax related, the victory is in the planning. Don’t leave it too late. Make sure you don’t get caught out by HMRC’s APR challenges.