Many farmers want to pass their farm onto the next generation and to do so as tax efficiently as possible. It is therefore essential that farming families plan carefully for the future of the farm and their business interests, whilst thinking about their long-term aims carefully and with tax liabilities in mind.
Farming Families and Wills
One factor in a good succession plan is to ensure everyone involved in the farming business has a Will, and to consider how these tie in with the structure of the business, such as a partnership or shareholder agreement. This will enable the farm and any related business(es) to pass to the beneficiaries in accordance with the farmer’s wishes following their death.
If someone dies without a Will, the law decides what happens to the estate (under the intestacy rules) and the farmer is not able to direct who inherits the farming business. If the farmer is survived by his widow or widower and children, it could leave the surviving spouse vulnerable as she or he may not necessarily inherit the entire estate. If a farmer dies without a Will and the estate passes to children, this could lead to disputes within farming families, particularly if some are involved in the farming operations and others are not. It could also endanger the viability of the farm if some family members want to continue farming and need to raise money to buy out non-farming members.
Review Your Inheritance Tax Position
An essential part of succession planning is a review of the inheritance tax position on the death of the farmer. There are some generous reliefs available for farmers provided certain conditions are met. Farmers should therefore keep these conditions under review and take steps where possible to ensure these are available.
It is often misunderstood that the main farmhouse will automatically qualify for Agricultural Property Relief (APR) if the land is being farmed. However if the farmer is no longer able to farm through ill health or retirement, this can present problems. Similarly, if the farmer is living in the house but has let all his land out to tenants, the relief on the house will be lost as he or she will no longer be occupying the house for agricultural purposes. This could have an impact on the inheritance tax payable although some inheritance tax could be mitigated with good financial planning. Similarly, if the land has development potential, APR may not apply in full.
Get Regular Advice on APR
HMRC are scrutinising claims for APR more thoroughly, particularly if a farmer had retired and was not actively involved in the farming activities at the time of death. If the farmer for instance had to go into care before he or she died, the relief may not apply. It is also necessary for the land to have either been occupied by the owner for two years or owned by him for seven years where someone else occupies the land for agriculture.
If the farmhouse was no longer the centre of the farming operations, relief may not be available unless one of the family members involved in the farming business was occupying the farmhouse and were active in the family farming business.
Review Grazing Licence Arrangements
Farmers should also review their grazing licence arrangements to ensure the conditions for occupation are met. Although the land is grazed by someone else, the farmer will want to ensure they are still deemed to be the occupier for the land to qualify for APR.
Retaining responsibility for the maintenance and repair of the land is also essential to prove the conditions for occupation are met. By keeping receipts for repairs and a log of the day-to-day farming activities with farm accounts, these could be presented to HMRC in the event of a claim for the relief.
Succession Planning Is Key
It is advisable to regularly review the succession plan and document any changes at the farm including key responsibilities of farming family members and retain evidence of these. That way, with good planning, the farmer should be able to pass on the farm with the appropriate reliefs.
Robust succession planning for farming families is greatly affected by different specialist areas of law and we cannot stress enough how planning in advance can not only save money to pass to the next generation, but will serve to settle any family disagreements too.