Farm Inheritance Tax: Advice on paying Inheritance Tax as a working farm

You may be surprised to hear about which estates have to pay inheritance tax (IHT) on death.   Once you have farmed for more than two years, most working farms are able to pass from one generation to the next with no or reduced inheritance tax being payable. 

This does not, however, always mean that there is no IHT to pay so you still have to bear it in mind.

Agricultural Property Relief and inheritance tax on farms

Agricultural Property Relief (APR) can be claimed for most agricultural land. Businesses can also claim Business Relief (BR) so the value of the land and business are not taken into account at all for IHT purposes. 

The key is to check that the asset genuinely forms part of a farming business. This is more likely to be the case for an orchard where there is an active harvest for cider than one enjoyed less formally.

APR for farmhouses

In a world of high residential property and land values, the APR for farmhouses can be of great value, but do not assume that you can use it.  If the house is let to the local teacher it is not being used for agriculture, so will not qualify.  If it is disproportionately grand house with few acres, it may not qualify. 

IHT on farm buildings used as venues

You can increase a farmhouse’s chance of qualifying for maximum APR by holding business meetings there and documenting the venue ,and using the address for business correspondence. Always remember, though, that while a discount is likely you cannot guarantee the outcome, especially after retirement.

Empty farmhouses and APR

You should make sure your farm and the buildings are being used.  Once empty they are unlikely to qualify for the IHT agricultural relief.  If you no longer want to be as active as you used to be, you may be able to keep the APR by employing contractors to continue your work or arranging to let the land to other farmers.  Hopefully, you will be able to enjoy the extra income to live your best life as well as helping your heirs save inheritance tax.

Farm diversification and APR

If you have diversified your farm, your other businesses may not qualify for APR. Instead, they might qualify for BR, providing you can show it is a trading business such as a café or a farm shop and is not just an investment asset. 

Cottages let to non-farmers will not qualify for APR nor BR.  Even a courtyard of holiday cottages is unlikely to qualify.  You should speak to your Accountant for ideas as to how to get your business over the line to claim the reliefs.

IHT agricultural relief rates

If you don’t qualify for APR or BR then only the first £325,000 (the Nil rate band or NRB) of an estate will be exempt from IHT.  Your NRB can be transferred to your spouse’s estate so that it can be used alongside their NRB on the second death.  This means that on the second death £650,000 of assets can be left without paying IHT. 

If you leave a non-farmhouse home to your children, grandchildren or step children, then there is an additional IHT allowance of £175,000 per person.  Again, if you die before your spouse the allowance can be used on the survivor’s death.  As a result, you can leave up to £1million to your children with no IHT liability at all.  This is significantly more than an unmarried person without children can leave without IHT.  The rest will be taxed at 40%.  The NRB has been unchanged since 2009 and is unlikely to increase until 2029. 

If you live together but are not married, you will not be able to claim the spouse exemption – will your partner be able to afford your death?  What can you do?  Getting married is one possibility as that would then mean any assets passing to your spouse would pass tax free.   

We hope you enjoy life but do work with Solicitors, Land Agents and Accountants to help the next generation continue the farm business.   

For Inheritance Tax legal advice, please contact a member of our Private Client team.