My experience with Inheritance Tax and especially with Farm Inheritance Tax Relief is that it appears to be applied inconsistently and that what you have allowed as relief against inheritance tax appears to increase greatly with the bill that your estate pays to its tax advisor. When settling an estate it is not enough to just get advice, but get good advice, for which you will have to pay accordingly. Although there are rules on taxable business and agricultural assets it is my opinion that there is only a glaze of consistency in their application.
The simple fact is that what is deemed an Agricultural Asset for Inheritance Tax is subject to rules of use and occupation.
Consider these examples:
Example 1: 40 acre field owned by Leah – she grows grass and crops hay off it which she sells to the local stables. It is an Agricultural asset.
However the same 40 acre field owned by Leah where she grazes five horses which her and her friends enjoy riding – it is NOT an agricultural asset. However, if the horses were used to plough a field it would be an agricultural asset.
Example 2: Farmer Sarah has a family farm of 320 acres with a farmhouse. Her elderly retired parents live in the farmhouse, whereas she and her partner, kids and pet dog live in a cottage in the village. Because the farmhouse is lived in by a retired farmer it is highly likely not to qualify as an Agricultural Asset, but rather a personal dwelling. Even if she swaps homes with her parents the farmhouse will only be deemed as Agricultural asset if it is perceived to be used for the business e.g. has an office within the premises.
Example 3: Amy has 120 acres with a yard and shed that she farms using local contractors. The shed is not used. Because it is not used by the farm it is possibly not either an Agricultural or a Business asset.
Example 4: Farmer Luke borrowed £200,000 to do up an old farm building and convert it into living accommodation for a farm worker. As his work Capital Facilities are already secured on a 50 acre field he decided to use this security to fund the cost. Upon death he is allowed to offset the debt against the value of the land for which it is security. This means that foresight is required as to which piece of security will make the most of any inheritance tax allowance and debt offset in case of early death.
Example 5: Andrew is a retired banker and has bought a small farm of 80 acres. He does not farm it himself, but enjoys the benefit of Agricultural Inheritance Tax Relief because he appears to farm it by using a shared farming arrangement by a larger farmer managing the land. He is not encumbered with any machinery assets that could eat into that relief. This type of asset use for tax benefit accounted for 18% of the “small farms” in my first portfolio as described in my letter posted 12th November 2024. See linked posts.
We are all familiar with a class of farmer that has made money elsewhere and then invested in a farm to benefit from Inheritance Tax Relief. To not consider these as proper farms and farmers is folly.
You do not buy a farming asset worth millions to then mismanage it and you need to inject substantial working capital of hundreds of pounds per acre just to make it work. But if you have the cash from another income, profession or investments this is not an issue.
There is possibly a clear intention of the current Labour policy to capture these as “tax avoiders” with the Inheritance Tax, however there is a significant difference, in almost every case they have the cash and the homes and livelihoods of their successors are not placed at risk. The simple fact is that the returns on many small family farms are currently too low to generate surplus cash or to service an Inheritance Tax Bill over ten years.
Fiscal policy is about winners and losers. Not understanding what a small family farm is and its abilities is a severe government weakness.
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