Advice on tax implications of restructuring a farm business
© Jan/Adobe Stock High land values mean the tax risks of poor planning and rushed decisions can prove very expensive.
Poor decisions can arise for many reasons, including family or financial pressure, grudges, illness, persuasion by an outside commercial interest or simply because of misunderstandings about the implications of what is being done.
“I see examples twice a week of changes that have not been properly planned,” says Hampshire accountant Julie Butler, founding director of Butler & Co.
“If it’s a question of changing a legal entity or moving any significant assets, then tax and legal advice is essential.”
See also: Tax consultation response calls for natural capital payment changes
This applies just as much to internal or family transfers of assets as it does to selling or transferring land, farms or other property assets to others.
It is also good practice to review existing business and ownership structures periodically as this can often identify tax risks.
For example, in farming partnerships, too many families rely on unwritten or poorly drafted partnership agreements, advisers warn.
Ownership and tax
While farming assets will usually qualify for 100% agricultural property relief (APR) from inheritance tax (IHT), one of the main tax risks to farming partnerships is the IHT relief through business property relief (BPR).
This arises when assets that qualify for BPR rather than APR are owned not by the partnership but by its individual members, says Julie.
“These are typically let cottages and commercial lets, non-agricultural enterprises such as farm shops, liveries and other diversifications.
“If these are owned outside the partnership, they will attract only 50% BPR instead of 100%, so they should be partnership assets,” she says.
Even where there is a partnership agreement, that agreement and the accounts often contradict each other on the ownership of land and other farming assets, so check this too.
Inheritance tax relief refresher
Agricultural property relief (APR) is available at 100% or 50% from inheritance tax (IHT) on the agricultural value of property.
To qualify, the property must have been owned and continuously occupied by the owner for at least the two years prior to death and for agricultural purposes.
In the case of tenanted farmland, it must have been owned for at least seven years prior to the death and have been continuously occupied for agricultural purposes during that time.
APR is the first option, but business property relief (BPR) may be available on assets that do not qualify for APR.
BPR is also at 100% or 50%, with the 100% rate for an interest in a business, such as partnership shares.
To qualify for BPR, the business must be judged to be wholly or mainly trading.
There is a two-year ownership qualifying period for BPR. However, where land or other assets are added to a business within that period, they can also qualify, depending on the circumstances.
Land that is partnership property should be accounted for by showing its value on the business balance sheet, with shares split between the partners, reflecting their ownership proportion.
Rushed decisions
Rushed decisions without tax and legal advice can lead to unexpected and unnecessary tax bills.
“For example, we have seen landowners move land into a company without tax and legal advice.
“This can result in unnecessary capital gains tax, IHT and stamp duty land tax bills and is especially the case where development land is involved.
“All development deals are complicated and need independent help on valuations, alternative deal structures and the tax impact, as mistakes can be very expensive.”
Timing
Many of the changes made in business and family restructuring need time not only for advice to be obtained, considered and decisions made, but also for the changes to take effect for a certain period before the desired tax position is established.
For example, for land to qualify for APR, it must be owned by the person and used for the purposes of agriculture for at least for two years prior to death. For tenanted land, the qualifying period is seven years.
For gifts to pass free of IHT, they must be made at least seven years before the donor’s death.
In addition to the IHT issues, some long-term land uses will devalue the land, leading to capital gains tax questions and valuation challenges.
Wills
It is common for the content of wills within a farming partnership to be kept confidential but it can be better for farm succession planning to have an outline understanding of who will inherit each farming partner’s share, suggests Julie, as this affects the continuation of the business.
Environmental schemes and ecosystem service payments
The tax treatment of payments through many emerging environmental schemes and for “ecosystem services” such as carbon credits is at best unclear.
There are many aspects to this, chiefly whether land in long-term environmental land uses will qualify for inheritance tax (IHT) relief and, second, whether annual or upfront receipts for environmental management of land will be subject to income or capital taxes.
The government has consulted on this but has not announced its decision, so advisers are having to act without guidance from the tax authorities.
“The wide range of potential tax treatments creates controversy and greater complexity,” says accountant Julie Butler.
Environmental land use tax gap
Some businesses have already entered private schemes for environmental services such as rewilding or wetland creation and are now in a “tax gap” as to whether what they are doing will qualify for IHT relief and how to treat creation and maintenance payments.
Julie advises that the tax treatment for different trading vehicles varies.
Likewise, the long-term environmental schemes and contracts vary, so all tax planning has to be tailor made with forensic understanding and that is difficult without formal HMRC guidance.
Her advice for the time being is to account for all receipts as income, setting off the management and maintenance costs of the scheme against this income in the accounts, including the expected costs over, say, the next 10 years.
A further issue has arisen where land has already been put under rewilding or other “extreme” environmental uses, the owner has passed away and probate is applied for, giving rise to IHT considerations.
In the interim, Julie suggests the case should be put forward for agricultural property relief (APR), based on evidence, case law and the pressure on farmers for environmental land uses.
Failing that, then business property relief (BPR) should be sought as part of the whole business, she says.
“For IHT protection, it is advised that in this interim period, farmers should consider joining the pilot or formal Environmental Land Management schemes if possible. They should keep evidence to support APR/BPR claims.”
HMRC scrutiny of IHT and CGT claims
Gary Markham of accountant and adviser Land Family Business says that HMRC is stepping up its scrutiny of inheritance tax (IHT) and capital gains tax (CGT) claims, with an additional £79m pledged in this year’s Budget to HMRC’s tax fraud resources.
“They are increasingly questioning transactions by high net worth individuals, and many farmers fall into that category,” says Gary.
“It’s not necessarily leading to full-blown investigations, but valuations are being looked at very closely, on both IHT and CGT.
“They are interested in CGT claims for business asset disposal relief and land transfers within families or businesses.”
Recent cases Gary has seen demonstrate many missed opportunities for tax planning, he says.
“Many accountants do a great job but are not tax or agricultural specialists. Don’t be afraid to ask for a second opinion or get specialist advice alongside your regular accountant, it’s very common these days.
“The key is to get advice in good time so that you have at least two years to put things in place.”
At Butler & Co, Fred Butler says that in his experience, district valuers from the Valuations Office Agency are increasingly being called in by HMRC to assess IHT claims, not just on farms but across the board.
Where farms are involved, it is often the claim on the farmhouse value that is in question.
“Unfortunately, the district valuers are under workload pressure and have not been able to cope with all the appointments,” says Fred.
On top of that, communications between HMRC and the district valuers seem to break down on almost every case we are working on. It’s extremely frustrating.”
The content of this article refers to schemes and situations in England and in terms of partnership and tax issues, also to Wales. The IHT regime applies UK-wide, but Scotland has a different SDLT regime and a different legal system.