As rural businesses expand and diversify beyond traditional farming activities and as land in many areas is now worth more than agricultural value, Agricultural Property Relief (APR) is no longer sufficient to shelter assets from Inheritance Tax (IHT). Where that happens, capital taxes planning must move with the times and ensure that Business Property Relief (BPR) steps in.
Most farmers pass on their farms to the next generation only on death. This provides the benefit of a tax-free uplift to probate value of Capital Gains Tax base costs for the inherited assets but securing 100% relief from IHT by use of APR, BPR or a mixture of the two is then essential.
Successful succession planning depends on having full, frank and open lifetime discussions with all family members with an interest in the business, assisted by the proactive involvement of the family’s professional advisers. Beneficiaries need to understand in advance who will inherit what and why.
By far the most popular business structure within the farms and estates sector is the multi-generational family partnership. However, not all members of a farming family will necessarily be partners or actively involved in the business. This can lead to a disparity in inheritances and cause conflicts within the family, which need to be managed.
Before devising and implementing a succession plan, it is essential to check that all of the fundamentals of the business are in place and properly documented – especially in relation to land ownership, partnership agreements, wills, accounts and trust deeds (where relevant) – and that the documents are all consistent with each other.
Land
In any farming business, it is essential to know who owns the land and where the boundaries lie. Having the land registered may help to resolve future uncertainties.
Many farming families have an “understanding” as to how their land is held but this can often be very different from the documentary evidence relating to ownership. Interests in land can only be transferred in writing and it is important to establish the written evidence in support of both the legal and beneficial interests.
Business partners (and family members outside the partnership) often do not differentiate between jointly held property and partnership property but, where APR is limited or unavailable and reliance has to be placed on BPR, the distinction can make the difference between 100% relief and no relief at all. Put the position beyond doubt by a declaration of trust embodied in a signed partnership deed.
It is essential that arrangements relating to land used for cultivating grass are properly documented and strictly implemented. Any failures can result in a loss of BPR on the land, which may have development potential, and a loss of APR on the farmhouse.
A grazing agreement must not be a tenancy; grazing income must be shown as farm trading income, and not as rental income, in the farm accounts. The grazier must have no rights other than to put his animals on the land for a limited period each year so that the animals can consume the grass crop. The landowner must be the one who occupies the land and carries out all acts of husbandry needed to grow the grass crop, such as fertilising, seeding, weeding and maintaining boundaries and water supply.
Partnership Agreement
Every farming partnership should have a robust partnership agreement in place from the commencement of business. This must be properly thought through and all potential sources of disagreement should be covered in the document. All of the details should be clear and not dependent on interpretation – especially the provisions governing retirement and death, where, in the absence of an agreement, the partnership can be dissolved automatically under the Partnership Act.
In order to maximise BPR, land must be a partnership asset in the partnership accounts. This requires the partnership agreement to incorporate a declaration of trust so the agreement needs to be a legally binding deed.
The agreement must be signed and dated by all of the partners. It should be reviewed whenever partnership accounts are prepared and updated regularly to keep it in line with the partners’ wills and other estate planning documents.
Wills
Every partner in a farming partnership needs to have an up to date will and relevant Powers of Attorney. These should be regularly reviewed and updated whenever there are any changes in the circumstances of the partner or those of his immediate family.
A partner’s will should recognise his ownership of a share of the assets of the partnership and be consistent with the provisions of the partnership agreement relating to death and retirement. In particular, a partner’s executors should be able to withdraw land in specie from a partnership to give effect to that partner’s wish to leave land in his will to specific family members, notwithstanding that the remaining partners may have an option in the partnership agreement to acquire the partnership share of the deceased partner.
Accounts
Land must be shown as a partnership asset in the partnership accounts to secure full 100% BPR but this in itself is not necessarily sufficient to deliver the relief. It is essential that there should be clear evidence in the form of a signed partnership deed that land is held as partnership property.
All farm partnership accounts should refer to the partnership agreement and should not be prepared without sight or knowledge of such an agreement. The accounts should reflect the partners’ intentions – if they do not reflect what was agreed, they can be disregarded.
Partnership accounts should be discussed with all partners to ensure that no assets have been included or omitted in error and all income (including, especially, from grazing rights) has been treated correctly. The accounts should be signed and dated by all partners.
Trust deeds
Whenever any land is held within one or more family trusts, it is essential that the trust deeds be reviewed regularly to check the entitlements of the income and capital beneficiaries and be reflected in the trust accounts. The trustees should also be involved in discussions within the family and with professional advisers.
Getting your house in order
Achieving a successful succession while keeping all family members happy and minimising the tax payable on the deceased’s estate is not straightforward. With our experience in property and tax and in supporting families, BKL can help to steer you through the difficulties.
For more information, please get in touch with your usual BKL contact or use our enquiry form.