The decision whether to sell a farm or to lease it is one many farmers and landowners will agonise over at some stage. John Robson, director at Robson & Liddle Chartered Surveyors, weighs up the options.
Given the generous tax reliefs available in the agricultural sector, most decisions on whether to sell or lease are usually tax driven, but also come down to your individual circumstances and succession plan.
A farm business gets 100 per cent inheritance tax relief but the farmer must be ‘in harness’, so to speak. However, there are tax issues relating to the value of the farmhouse that need careful consideration and, in most cases, there will be an element of value that’s considered to be over and above ‘agricultural’.
Benefiting from tax reliefs
Agricultural property has 100 per cent relief where it is farmed by the owner or let to a third party under a tenancy commencing on or after 1 September 1995. The 100 per cent relief also applies under older tenancies, providing certain conditions are met. In any other case, the relief is available at only 50 per cent. Furthermore, any value from the possible sale of the land for development purposes cannot qualify for agricultural property relief.
In addition to agricultural property relief, farmland frequently qualifies for inheritance tax business property relief. This is not restricted to the agricultural value of the land and so may cover any value from future redevelopment. However, to achieve 100 per cent business property relief, the land must be part of a business activity carried on by the owner at the date of death.
The farmhouse dilemma
The law states that the farmhouse must be occupied with its surrounding farmland and must be of a character appropriate to the whole acreage involved. If therefore, the farmhouse is of significant size, but the farmland is held within a family farming company, relief may well be denied.
In addition, several cases have demonstrated that to qualify for relief, the occupier of a farmhouse must be engaged in farming as a daily activity and the house must be the centre of the farming operations. Clearly, this presents difficulties for elderly farmers who continue in occupation of the farmhouse, but are not able to carry on the farm business themselves.
Sale of farmland for redevelopment
Many farmers find it possible to realise significant capital sums by the sale of land for redevelopment purposes. However, this will often give rise to a liability to capital gains tax at a rate of 28 per cent. Any gain, however, can be ‘rolled over’ if the proceeds of the sale are reinvested in the purchase of other business assets, bearing in mind that such assets can only be sold once and careful planning can secure the future of the business.
Using a trust
Prior to the sale, the landowner may also consider transferring the land, or a share in it, to a trust for the next generation. This can allow them to hold over the capital gain and claim exemption from inheritance tax. In the case of a future sale the rate of tax payable by the trustees will be 28 per cent.
This type of planning can be very tax efficient, but it must be noted that the inheritance tax reliefs on the transfer are withdrawn if the settlor dies within seven years of the creation of the settlement and the land is no longer being used for business purposes. In other words, this type of tax planning can give highly adverse tax results in the event of the untimely death of the donor.
It’s also worth noting that all land which qualifies for inheritance tax agricultural property relief can be given away, for example to the next generation, without liability to capital gains tax being incurred. The gain arising on a gift can be ‘held over’ to the transferee, so that the transferee takes the land at the transferor’s original cost price.
Succession and tax planning
Many farmers will want to pass the farm down to their children and they may start this process as they get to retirement age. However, tax and succession issues need to be thought about at a much earlier stage. It’s vital that professional advice is taken if you are to retain the valuable inheritance reliefs on the estate and to provide for all members of the next generation.
In summary, the various tax reliefs for farmland are generous and care should be taken to use them. Where it is inevitable that they will cease to be available in the foreseeable future, an immediate gift of the land to a family trust, or direct to the next generation, should be considered, but in all cases, careful consideration and advice is needed.
For advice on any rural land and property issues, call John on 01768 254 354.