Business Clinic: Will a wind turbine affect inheritance tax?

Whether you have a legal, tax, insurance, management or land issue, Farmers Weekly’s Business Clinic experts can help.

Peter Griffiths, tax director at Hazlewoods, offers advice on how best to handle a wind turbine to minimise IHT.

Q. I am 71 years old and I farm a 250-acre dairy farm (owner-occupied) with my wife, son and daughter-in-law.

In 2013, the partnership erected a 50kVA wind turbine on the farm, which we purchased outright.

The sole purpose of the turbine is to supply electricity to run the 250-cow dairy herd. Excess units are sold to the National Grid.

The revenue generated by the turbine is a component of the partnership profit-and-loss account and the turbine is included on the partnership balance sheet.

It is my son’s intention to remain in the dairy sector for at least the next 30 years. What IHT implications should I consider regarding the turbine?

A. Farming can be an efficient activity with regard to inheritance tax (IHT) because of the availability of Agricultural Property Relief (APR) and Business Property Relief (BPR).

These reliefs often mean that on the death of a partner in a trading farming business, the value of their partnership interest does not incur any IHT, including the value of the house they live in. 

Peter Griffiths is a tax director at Hazlewoods

APR is available in respect of the agricultural value of land and buildings, including a farmhouse, while BPR is available on any value of the land and buildings above agricultural value and on the value of the other business assets, such as equipment and vehicles.

BPR is not available in respect of the value of a farmhouse.

See also: Be clear on farm asset ownership

The market value of a wind turbine constructed to produce electricity for a trading farming business will be covered by BPR on the death of a partner. Therefore the turbine will not require any additional IHT planning when compared with more usual farming assets, such as a tractor.

However, IHT planning may be required regarding the land on which the turbine stands. If this land is included in the partnership balance sheet, then 100% BPR should be available in respect of the value of the land and no further IHT planning will be required.

If the land is not included in the partnership balance sheet, then the value of the land over agricultural value will be eligible for BPR at a rate of only 50%.

Therefore, depending on the market value of this land and your interest in it, you may decide to transfer the land into the partnership balance sheet to maximise available IHT relief.

There are good IHT reasons for individuals to remain a partner in a farming partnership until their death.

This can allow APR to be obtained on the value of the house they live in and 100% BPR to be obtained on the full market value of farm land and buildings that are included in the partnership, even where these may have development or other non-agricultural value.

BPR may also be claimed on assets such as let farm cottages if they are included as partnership assets. If such properties were held outside of a trading business, they are likely to be subject to IHT on death.

In more general terms, if you decide to transfer part of your partnership share, or land you own that is used in the partnership, to the next generation during your lifetime then this can usually be done with no capital gains tax (CGT) charge by claiming gift/holdover relief.

No IHT liability will arise if the assets are being used in a farming business at the time of your death or if you survive seven years after transfer of the asset. 

Holding farming assets until death can be tax efficient as the assets will be uplifted to market value for CGT purposes, with no CGT charge and no IHT charge if 100% BPR is available.

Against this must be weighed the uncertainty this may create for the next generation and the risk that the tax rules may change or the way assets are utilised may change.

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