19 July 2018
If like many farmers you own your farmhouse as part of your business, you need to understand if it qualifies for Agricultural Property Relief (APR). APR has a huge advantage in that Inheritance Tax (IHT) can be extended to include your farmhouse as well as the land you use for agricultural activities. You then have the benefit to choose whether to pass on your agricultural property, free of IHT, either during your lifetime or as part of your Will.
To qualify for APR, agricultural property is defined as land or pasture which is used to grow crops, or to rear animals intensively. It also includes:
- stud farms for breeding and rearing horses and grazing
- trees that are planted and harvested at least every ten years (short-rotation coppice)
- land not currently being farmed under the Habitat Scheme
- land not currently being farmed under a crop rotation scheme
- the value of milk quota associated with the land
- some agricultural shares and securities, and
- farm buildings, farm cottages and farmhouses.
The value of your farmhouse includes the permitted area of the property. The permitted area incorporates the garden and buildings within the grounds, so long as they are required for the reasonable enjoyment of the dwelling house. The value then, including the permitted area that will qualify for APR, is based on the value as if it could only be used for agricultural purposes. The value of the farmhouse over and above the agricultural value, such as the open market price of an attractive country residence, does not qualify for APR.
You need to note that derelict buildings and property, subject to a binding contract for sale will not qualify for APR, so you need to consider these buildings carefully. We can help you to plan how they should be used commercially on your farm or estate to achieve the best out of the valuable reliefs which are available to you.
The cottage or farmhouse must be occupied by someone employed in farming, a retired farm employee or the spouse or civil partner of a deceased farm employee. They must occupy the property as a tenant under a lease granted as part of their former employment contract or a protected tenant with statutory rights.
In the past, we have seen HMRC challenge claims when, for example, an older farmer retires, but still remains in the farmhouse. HMRC are prepared to challenge any claim for APR on the grounds that the farmhouse has now become a ‘home for retirement’.
HMRC defines the farmhouse as a dwelling for the farmer from which the farm is managed. The farm management and operations must be conducted at the property for it to be a farmhouse. Be careful, if part of the farming operation is run from a farm office or the managing agents’ office, it may impact on the availability of APR to you.
It is critical that you consider the current ownership and occupation of your farmhouse along with any associated cottage(s) and land. You need to consider the occupation structure under the current APR legislation. Look carefully to ensure occupation is tied to the agricultural activity, and that you have retained sufficient evidence to defend this position should it be challenged when you make the claim for APR. With careful planning we may be able to improve your IHT position prior to a chargeable event occurring. A chargeable event for IHT could be death or a gift to a trust which could give rise to a tax liability where APR would be claimed.
Hope or development value and the value of sporting rights will not be covered by APR. This is where you need to consider Business Property Relief (BPR) to assist with planning. BPR can give 100% relief (businesses, interests in businesses, shares in unquoted companies) or 50% relief (land, buildings, and plant owned by the person making the transfer and used by a company/business/partnership under their control), depending on your specific circumstances.
For more information about APR, please contact your local expert for more information.
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