Although farmland can be exempt from inheritance tax in most cases, careful planning is still needed to minimise tax bills at the time of death, farmers have been warned.
“It is worth taking a step back to look at your business, its structures and its activities, to make sure you are doing all you can to maximise the reliefs that are available for inheritance tax,” said Kathy Blair from accountancy firm CavanaghKelly.
Inheritance tax is payable on money and the value of assets that are owned by a person at the time of their death.
The standard rate is 40%, although it does not apply to the first £325,000 worth of assets, which is known as the nil rate band.
Speaking at the Northern Counties Co-op in Swatragh, Blair explained that agricultural property relief (APR) does not always apply to all assets owned by farmers.
APR can allow up to 100% relief from inheritance tax on agricultural property if it has been owned and occupied by the owner for at least two years. If the farm is let out to someone else, it needs to have been in the owner’s possession for at least seven years to be eligible for APR.
But APR only covers the agricultural value of the property, so farmland with development potential or so-called “hope value” might not be eligible for full relief under APR. Likewise, the farmhouse can sometimes fall outside of APR.
“Farm management and operations must be conducted at the property to be eligible for APR, but it could be hard to argue that a 4,000 square foot house is needed to run a small family farm,” Blair said.
Other mechanisms to limit inheritance tax bills can be available to farming families, such as business property relief which allows either 50% or 100% relief.
Blair said gifting property and money to relatives before death can be an “extremely effective way” of reducing inheritance tax liabilities, but it can potentially lead to other issues with capital gains tax or income tax.
Also, if the person dies within seven years of making a gift, inheritance tax may need to be paid.
“All families are different, the assets that they own are different, and their relationships are different. If you have any concerns about inheritance tax or succession, go and speak to your accountant,” Blair said.
All farmers urged to make a will
It is a common misconception that a person’s assets automatically transfer to their spouse if a will is not in place when they die, Kathy Blair said during the tax planning event in Swatragh.
Blair explained that in NI, the spouse is entitled to the first £250,000 of assets, but other family members may be entitled to shares after that.
“This can potentially result in your assets being divided between a number of relatives. This can often cause disputes within families and lead to the possible break up of a farming business,” she said.
Blair strongly advised all farmers to make a will and pointed out that it can be easily amended as circumstances change. She also said that wills can be changed after a person dies, if everyone who is named on the original will agrees.
The example was given of a will being changed so that the assets are transferred to the person’s spouse rather than their children.
This could be done for tax reasons, as transfers between spouses are exempt from inheritance tax, and delaying the transfer to the children could allow more time for tax planning.
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