Tax Planning - Farmland

With the many tax reliefs available, there are opportunities for tax planning with farmland, in order to mitigate the liabilities that…

…may arise in the absence of planning.

Introduction

Farming and land ownership are both long-term activities in which businesses have traditionally been passed down the generations. As farmers have held their capital in relatively illiquid assets, such as land and buildings, capital based taxation has in the past been severely damaging to farms and farmland. However, over the last decade a range of capital tax reliefs have been introduced to mitigate the impact.

Where may investment in farmland be appropriate?

Tax planning with farmland may be appropriate where:

the potential inheritance tax reliefs are attractive
significant capital gains from the sale of business assets need to be rolled over.

Other perceived attractions of owning farmland are the lifestyle and status it confers upon the landowner.

What is farmland?

Farmland is land in the UK occupied wholly or mainly for the purposes of husbandry such as the production of cereals, milk, dairy products, livestock and their products. For inheritance tax purposes farmland is extended to include woodlands and any buildings used in connection with the farming business and the occupation of which is ancillary to the farmland. This can include cottages, farm buildings and farmhouses, which are of a character appropriate to the farmland. Farmland is also extended to include stud farms.

What inheritance tax reliefs are available?

There are two principal reliefs from inheritance tax, namely Agricultural Property Relief and Business Property Relief. Both of these reliefs, subject to certain ownership conditions, operate by reducing the value of qualifying assets liable to inheritance tax.

The reductions are as follows:

100% for the agricultural value of farmland, including farmland under certain tenancies which commenced after 31 August 1995
50% for the agricultural value of most other tenanted agricultural land
100% for interests in business assets owned by a sole trader or by a partnership and shares in private companies carrying on a business
50% for land, buildings and certain other assets used in a farming partnership or company, but owned personally (and not otherwise covered by agricultural property relief).

The effect of these reliefs is to remove much farmland from the charge to inheritance tax. Care is needed, however, if the land or farm buildings have development or amenity value and are owned personally and used by a farming partnership or company. In these cases, relief may be restricted to 50% of the development or amenity value and hence the structuring of the business can be important.

The availability of Agricultural Property Relief on the farmhouse is unique, reflecting the close involvement of the farmer with the business. However, this means that the appropriateness of the farmhouse is closely scrutinised by the Inland Revenue. There have been a number of recent Special Commissioners cases dealing the availability of relief, and further advice should be sought in order to consider how relief can be maximised.

What are the ownership conditions?

To qualify for Agricultural Property Relief, the farmland must either:

have been owned and farmed in hand by the farmer for two years; or
owned by the farmer for seven years and used by someone else (eg tenant) for the purposes of farming.

Land ownership has often been linked with tenancies in the past, as this allows the landowner to divest himself of the day to day management of the farm. However, the capital tax disincentives have encouraged new vehicles for carrying on farming on the farmland such as share farming and contract farming. Provided that these agreements are structured carefully, these allow the landowner to be treated as a farmer by the Inland Revenue whilst delegating day to day farm management.

What capital gains tax reliefs are available?

If farmland is farmed in hand or by share or contract farming then the following capital gains tax reliefs are available:

rollover relief on the replacement of land and farm buildings with other qualifying business assets and vice-versa
holdover relief on gifts, even where the farmland is tenanted, provided that it would qualify for Agricultural Property Relief
taper relief at the higher rates for business assets.

From 6 April 2004, the definition of a business asset for the purposes of taper relief has been widened which should mean that tenanted land will qualify for the higher rates of taper relief from that date. However, it should be noted that prior to that date, the land is treated as a non-business asset which will reduce the rate of relief until 6 April 2014, unless planning is undertaken.

Farmers purchasing land following the introduction of the single farm payment (SFP) regime on 1 January 2005 should be aware that part of the cost could relate to the purchase of SFP entitlement, which is separate from the land. The disposal of SFP entitlement will be treated as a separate asset for capital gains purposes.

Are there special income tax rules?

There are special income tax rules for farmers which reflect the special nature of the agricultural business. These include:

the ability to average the individual's farm results between tax years, if this reduces the tax liability
an election to treat a herd of breeding animals as a capital asset rather than trading stock, which removes inflationary increases in the value of breeding stock from profit
rules to treat all farming as one trade, even if they are in different areas
the ability to claim capital allowances (agricultural buildings) on farm buildings and other permanent structures which would not otherwise qualify for capital allowances.

It should also be borne in mind that because the Inland Revenue consider that farming attracts investors because of the lifestyle, they have specific legislation which disallows farm loss relief against general income if the farm has made losses in the five previous years (ten years for stud farms). This is in addition to the restriction applicable to all trades where the Inland Revenue perceive that the trade is not being conducted on a commercial basis.

Conclusions

Farmland remains an attractive long-term capital tax shelter for individuals with significant capital gains, and those wishing to obtain the attractive inheritance tax reliefs associated with the farmland without the risks normally associated with business assets.

In recent years the profitability of farming has been affected by the Common Agricultural Policies and reductions in EU support due to successive GATT rounds. Various other factors such as Foot and Mouth, market prices and the BSE scare have further reduced income from what has been traditionally a business with low profitability. However, the availability of tax reliefs can help to mitigate the effects of variable farming incomes.

Who should I contact?

Grant Thornton has various specialist units throughout the country with staff experienced in dealing with the tax and financial consequences of farming and farmland investment and who recognise that those involved in farming have a unique set of concerns and influences. If you need advice on the tax planning issues associated with farming or if you are interested in receiving further factsheets, please contact the person at Grant Thornton who normally deals with your tax affairs, or the local office below.

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