Business Clinic: A tricky inheritance tax issue explained

Whether you have a legal, tax, insurance, management or land issue, Farmers Weekly’s Business Clinic experts can help. Here, Peter Griffiths, tax director at Hazlewoods, advises on inheritance tax (IHT) under different farming structures.

Q My uncle has for many years farmed 162ha in hand. However, in recent years he has engaged a number of third parties to undertake much of the work. 

Is this likely to jeopardise his future IHT position?

A Farming can be a very tax efficient activity in relation to IHT. 

It can mean that on death no IHT is suffered on the value of farming assets, including the value of a farmhouse, due to the availability of agricultural property relief (APR) and business property relief (BPR).

This can be a significant tax benefit following the increase in the value of farmland in recent years.

Peter Griffiths, tax director, Hazlewoods

For various reasons, a farmer may decide that part or all of their farm is farmed under a contract farming arrangement, share farming agreement or grazing licence, depending on the type of farming activities carried out.

Contract farming arrangements are usually only seen where arable or fruit and vegetable production is carried out, with grazing licences used in grass areas. 

See also: Business Clinic – can I roll over capital gain?

Structured correctly, contract farming arrangements, share farming agreements and grazing licences can mean the landowner is still eligible for valuable IHT reliefs.

In all three cases, the landowner must remain in occupation of the land for agricultural purposes and continue to claim the basic payment. In addition, all agreements should reflect what is actually happening in practice.

Under contract farming arrangements, although it is possible for any contractor to acquire the crops grown, this should not be a done deal, as this will be interpreted by HM Revenue & Customs as effectively being a tenancy agreement. In addition, the landowner must be deciding what crops are grown.

Where a grazing licence is in place, it is essential the landowner is regarded as growing a crop of grass for sale.

Therefore, they need to be rolling and harrowing the land, reseeding the land, fertilising the land, and maintaining hedges and ditches. 

It is possible for the grazier to be carrying out certain work for the farmer, but this needs to be done in a contracting role, with invoices being issued to the farmer for the work carried out. 

Any licence should only be for a limited period each year with the grazier removing their stock from the land outside of the licence period.

The amounts to be received by the farmer under the grazing licence should not be a fixed amount each year, but should vary depending on the quality and quantity of grass produced each year.

Structured and implemented correctly, contract farming arrangements, share farming agreements and grazing licences can ensure farmers remain eligible for the valuable IHT reliefs available. 

If land and buildings have been owned for a period of at least seven years, then APR can be obtained if the land is let under a farm business tenancy, and it is occupied by another party for agricultural purposes. 

However, APR is only available up to the agricultural value. Therefore, if there is development potential, this part of the value will not be covered by APR.

BPR covers the full market value but is only available if the land is farmed in hand or under a contract farming arrangement, share farming arrangement or grazing licence. 

Similarly, APR on a farmhouse is only available if the land is farmed in hand or under a contract farming arrangement, share farming arrangement or grazing licence.

Therefore, so your uncle’s future IHT position is not jeopardised it may be necessary for him to ensure parts of his land are not occupied under tenancies.

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