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Farmers face tax hike as wealthy exploit IHT rules

Farmers could be hit by an HMRC clampdown on inheritance tax dodging, an independent financial adviser has warned.

 

by Michelle McGagh on Aug 01, 2012 at 15:35

Farmers face tax hike as wealthy exploit IHT rules

Wealthy individuals buying up farmland to sidestep inheritance tax (IHT) are putting farmers at risk of a tax clampdown, an independent financial adviser has warned.

Purchasing farmland can provide a big tax planning opportunity as it benefits from agricultural property relief (APR) and business property relief (BPR). Land and buildings that benefit from these are exempt from IHT up to 100% of the value of the farmland.

This 100% IHT relief has made farmland a popular investment. However, you cannot simply buy a field and receive the relief: the farmland has to be used and managed even if it is not the owner of the land ploughing the fields.

Farmers in the firing line

However, Karl Hartey, managing director of Applewood Wealth Management, an independent financial adviser in Chester, has warned that buying farmland as a tax-minimising measure is putting genuine farmers at risk of a clampdown or additional taxes from HM Revenue & Customs.

He said farmers had two options to avoid any additional IHT they may face in future: ‘One option would be to make gifts over the seven-year period, or they could take out insurance,’ he said. If part of an estate is gifted away and the person making the gift survives seven years then it is free of IHT, but if they die within the seven year period the gift could be liable to IHT.

‘However, neither is ideal as HMRC will end up with tax which they don’t receive currently because those who have the ability to pay tax are using avoidance planning, which once again affects the normal man on the street.’

Price of farmland rises

Hartey pointed out that the mass purchasing of farmland was having another detrimental effect on local farmers, who are forced to pay increasingly high prices for land.

Figures from property group Knight Frank show that over the past three months the price of land has risen 3.7% to £6,295 an acre, and over 60 years it has risen more than 11,000%.

‘As we live in a rural area with plenty of farming clients, there is a concern that city money is buying up farms and small holdings to offer against IHT, as they did with forestry before,’ Hartey said.

‘However, this prices out the locals, and with the situation already challenging for farmers, they could do without the threat of being taxed on a farm which has been in the family for generations.’

A spokesman for HMRC, however, dismissed the idea that genuine farmers would be penalised. ‘Every case depends on specific facts but to qualify for the relief the property must have been dedicated to agriulture for a given period prior to the owner's death,' he said.

To learn more about avoiding inheritance tax, check out these guides from The Lolly:

13 comments so far. Why not have your say?

Ian Craig

Aug 01, 2012 at 17:56

It was outrageous when Blair handed out this IHT tax concession (about the same time he partly thinned the number of inherited title aristocrats attending the House of Lords - if I recall correctly). Why should farmers (farm-owners!) be allowed to hand-on their businesses to their children tax free, when all others can not? It's probably for the best that the concession is milked for all it's worth by anyone who can afford it, it'll force this odd concession out.

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The Wills Man

Aug 01, 2012 at 19:58

An odd concession Ian Craig? I think not. The whole purpose of APR and BPR is to protect farmers and businesses from a tax that could either cripple or force a business to collapse. Imagine a farmer who owned and farmed say 1,000 acres, (approximately £6.3m if the figures above are to be believed). When that farmer died his heirs would have yo cough up about £2.4m in IHT. Farming is not the profitable business it once was and such a figure would force most, if not all privately owned farms to sell to the big corporates and hey ho we're back to the 17th Century when there was only very rich and very poor.

On another tack; I notice in the article that the writer is afraid of losing his client base due to "city" investment. Methinks this is just a whinge article as clearly such a proposition as put forward has not been given a lot of thought.

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Anonymous 1 needed this 'off the record'

Aug 01, 2012 at 20:26

As someone with farmers in the family I can see how hard they work and for little gain for the hours put in. (would you get up at 5am every day to milk cows 365 days a year given the current milk price?). One of the key drivers in farming is the fact that you feel you are building something to pass on to your heirs. One of my relatives had farmed all of his life but when none of his kids wanted to take it over he sold up and promptly moved on.

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Ian Craig

Aug 01, 2012 at 23:28

Interesting replies, but none address the point: why should farming be special? People create all sorts of businesses, work all sorts of hours, and would want to hand it on whole - so tax-free - but don't get the chance. Everything else being equal inside the bottle, I'd always buy the cheapest pint of milk.

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S M

Aug 01, 2012 at 23:46

Its about time this piece of daftness was stamped out.

The rich landowners and farmers lobby has been very effective in garnering taxpayers money across the years.

Subsidies on the way up & then again on the way down . .

Red Diesel

IHT as above and Capital gains advantages.

Planning permission on the nod for farm buildings

Not many poor farmers & landowners.

One day we hopefully will see the end of the CAP and a free market in food that will advantage the consumer and poor farmers across the world.

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Jerseylil

Aug 02, 2012 at 09:25

Traditional family farming may be asset rich but it is cash poor. The value of the land is irrelevant to the owner unless he sells it, in which case it should be taxed like anything else.

Land as an investment is very much like gold, in that it is fixed in quantity and produces little return on its market value. Someone whose business is obtained from the land has no control over the value of the land and it is not relevant to the business, therefore to penalise a family farmer to the extent that he has to sell up, just because of this is very unfair. It will also lead to land ownership being restricted to canny investment bankers and their ilk.

The price of milk is only relevant to the farm business and has nothing whatever to do with the price of land or whether the producer owns his land or rents it.

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DirtyHarry

Aug 02, 2012 at 10:08

Like most other relief from IHT there should be a limit on the level of relief so that millionaire investors are not able to just hide their money in the land. Principally the relief should work for owner -farmers to enable future generations to run the family business without being saddled with excessive debt which may eventually lead to over consolidation of farming into the agri-business model.

Obviously other types of family business don't get this relief so the rules should be along the lines of the following -

Consider the minimum size a farm should be to form a viable business for a family.

Consider the maximum size/value of a farm to be allowed exemption.

Have rules such as the farm income should constitute at least 50% of the persons annual income for at least 5 years prior to death etc etc.

These would be quite easy criteria for HMRC to apply and maintain the principal of enabling family farms to be passed on to the next generation without the incumbence of excessive debt.

IHT for the rest of the population is far to high and kicks in at far too low a threshold and unlike many other countries UK IHT policies take limited account of the rights of descendants to gain from their parents productivity and frugality.

All too often it is only the middle earners that get taxed as the wealthy can afford to employ complex tax avoidance measures.

How do you think Canada, Australia and NZ can afford to have zero IHT? - lighter government/less politicians. Maybe an example we should follow.

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Andrew Shirley

Aug 02, 2012 at 12:28

First of all thanks for mentioning Knight Frank's stats in the article.

It's probably worth pointing out that farmers are still the biggest purchasers of agricultural land. Non-farmers buying land is also nothing new, many of the UK's biggest estates were bought off the back of the industrial revolution.

It's also not a bad thing for farming in general because these types of purchasers are unlikely to farm the land themselves. This provides opportunities for existing farmers (or new entrants to the sector) to expand by renting or contract farming the land and thus creating economies of scale that would otherwise be unavailable to them.

To answer Ian Craig's question about why farming should be a special case, Business Property Relief (BPR) is available for all types of business not just farming.

It does not, however, cover property owned as an investment. This means you cannot buy farmland and just rent it out to somebody to farm for you if you want to claim BPR.

Agricultural Property Relief (APR) is slightly different because, amongst other things, it does allow landowners to claim IHT relief on rented land, subject to satisfying certain conditions. This is to encourage the tenanted sector, which allows people to get involved in agriculture without the large capital outlay involved in buying land.

Without APR, landowners would be less likely to rent out land and thus starve the industry of new entrants, particularly the young and entrepreneurial.

HMRC is understandably keen to ensure that these reliefs are being applied correctly, particualry on residential property, but genuine active farmers should not need to panic, although planning your tax affairs well in advance of the need for any IHT claims is always a good idea to avoid nasty surprises.

Andrew Shirley

Head of Rural Property Research

Knight Frank

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The Wills Man

Aug 02, 2012 at 13:36

Well said Andrew Shirley

Sadly this article is another "foot in mouth" from Citywire - why does a reputable commentary site keep making such crass mistakes?

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Andrew Shirley

Aug 02, 2012 at 14:05

Thanks The Wills Man

Maybe it's because stories about percieved social injustices that involve wealthy bankers are most popular and attract lots of comments, generally involving huge sweeping generalisations?

Given that a large number of UK farmers wouldn't make any money without subsidies, I'm not sure how abolishing CAP as one person on this forum suggests would cut food prices. UK agriculture would become even more polarised between the huge agri-buinesses that seem so unpopular with the public and the small producers selling high-value "artisan" premium products that many people can't afford. You may well encourage some more imports from low-cost producers outside the EU, but that could be at the expense of food standards (there would be no stopping GM) and animal welfare.

CAP is badly flawed, but getting rid of it won't suddenly make food cheaper.

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Ian Lees

Aug 02, 2012 at 16:03

In response to Ian Craigs request for an answer - to why Farming is special, it is because it is a specialist area, in which farmers apply the standard of care the commitment in all weathers ( by their choice ) to produce food ! It doesn't just appear on the shelfs at Tesco's ! WIth others taking huuge profits form e.g Milk - the farmers lose out to the wholesalers and the distributors. Secondly, farming is in their blood - the passion, the commitment - and withou them you would be paying significantly more. In the third instance, it takes a very special person to be a farmer and this used to be recognised by MP's who had morals and scruples - rather than fiddling their expenses and hiking their salaries - and rather than being told what to do - what to vote for - by Grumpy Gordon, Phoney Tony or David cameron CBE ( can't be arsed ), taking no account of their constituents ( the voting public ). Farming was and remains an integral part of our economy - without which we could only forsee disatser.

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The Wills Man

Aug 02, 2012 at 17:43

Food prices today are (in real terms) less than a third of what our parents/grandparents paid in the 50's. This is partly because of subsidies that were designed to suit our Gallic friends, partly due to modernisation of methods and machinery and partly due to farmers being farmers as Ian Lees describes above.

If all the critics knew only a fraction of what any person who lives in rural farming communities knows they would shut up and pay up. Just where do they think milk comes from that only costs them 25p per pint or a loaf of bread for less than £1?

Farmers are literally our life savers - just try and live with a dairy cow on your front lawn that demands you milk it at 5am or grow enough wheat in your window box to allow you to grind it into flour to bake a fresh loaf of bread every day!

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David Rowse

Aug 02, 2012 at 19:45

Has this more to do with 'events, dear boy', than other factors? Treasury receipts are falling from tax returns and as the sinking ship gets ever more desperate it needs to seek receipts from anyone and everyone?

Are we approaching an era where government ministers will counsel that any tax avoidance is immoral (that firmly puts God in his/her place regarding rights over 'right and wrong'!) and that we will all descend into hell should we not gratefully pay everything that the state declares that we owe THEM?

In which case, come back Prince John - all is forgiven!

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