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Practical and technical tax issues when acting for farmers

Farming tax specialist Wayne Glenton looks at some practical and technical issues, including taxation in agriculture, inheritance tax – business property relief and agricultural property relief – partnerships, trade vs investment, CGT: entrepreneurs’ relief and gift hold-over relief.

FarmingAccountants acting for farming families often get asked: what exactly is an agricultural specialism? And what do you do differently from a ‘normal’ accountant? The answer is not always clear.

There are some areas, though, that generally differ, or on which there is more emphasis, than for mainstream general practice clients. You should consider these points when meeting with farmers for the first time or when considering taking one on.

Get to know the farm

This might sound obvious, but it’s surprising how often it is missed or not done thoroughly enough. The complications come from how geographically spread the farm may be and how personal each part of the farm is to the farmer or their family.

There is a degree of intuition and general knowledge that comes into play, as when advising most general businesses, but for a non-farmer there is very little of that to draw on if you aren’t from a farming background, which means you have to work harder. The best thing to do is to go to the farm, ask for a tour (even if you just sit in a Land Rover driving through fields, and glaze over when they talk about ‘blackgrass’). After the tour (or even during), you should be asking to look at maps of the farm and starting to connect some real-world experience and knowledge to the little parcels of land referred to in all the documentation.

This tour is probably one of the most important exercises to undertake, as this is the time when you start to understand the farmer’s aspirations, attitudes and problems and have the opportunity to really express an interest. You may drive past an area of wood and get the passing comment, 'we are thinking of maybe putting some holiday cottages in there, but dad won’t let us' and this will be a much more useful comment, which you can explore on the day, than one made from the other end of a telephone.

You need to get at least a close approximation of what the day-to-day life of the farmer is and how all that time is being turned into money (often you will find that it isn’t, and the subsidies keep them going); only then can you advise the farmer to the fullest extent of your ability.

While there are some accountants who are also from farming families, this is not a requirement to act for a farmer effectively and it shouldn’t discourage you. The farmer won’t mind if you ask ‘stupid’ questions and often will respect your honesty and willingness to understand. However, there is some base level knowledge that will (indeed, should) write you off as an appropriate adviser if you don’t have it, which is the subject of this article.

Get to know the family

Farming families typically have wider family relationships with the local community, extended families are often involved in a lot of the surrounding farmland, and there are often transactions with these other farms. It really helps to know these relationships ahead of time. There is a very strong farming culture and it is of course more a way of life than a business in a lot of cases. It follows then that among the first things you should do is ask for, or construct, a family tree. This is not an odd thing to do – it is actually essential.

While you are forming the family tree, you will also have the opportunity to start figuring out where the farm came from and how the current ownership came to be. This will be important for you to establish the tax position.

Taxation in agriculture

There are significant complexities in farming and situations can become very interesting very quickly. Specific tax areas that it is crucial to understand are the capital tax reliefs for both inheritance tax (IHT) and capital gains tax (CGT), and these are outlined later in this article.

Other areas include the herd basis, farm accounts and valuation, tenancies and farming through limited companies. These will be covered in a future article.

Land and property owned on death

This will form part of the estate of the deceased and will be taxed unless the value of the estate is below the nil rate band or unless relief can be obtained against the value using APR and BPR.

Inheritance tax: BPR

All conversations about any land will include business property relief (BPR) and agricultural property relief (APR). Farmers normally have a general understanding of the concept of these two reliefs, as they will have spoken about IHT relief before and will have made choices with this in mind.

BPR

Reduces the gain on the full value of the property by 100% if available. Conditions must be met.

APR

Reduces the gain on the agricultural value of the property by 100% if available. Conditions must be met.

If you are in tax in non-specialised fields you will already be familiar with BPR and the conditions for achieving it, as it is the same relief as for any other business asset. There is no particular complication to this in a farming context, save for some relevant case law and typical farming circumstances that you should be aware of. If you have a farmer who owns and farms their own land (either fully in hand, contract farmed or share farmed) BPR is your first consideration.

BPR is covered under ss103-114, Inheritance Tax Act 1984 (IHTA 1984). There are two key elements to achieving relief that should be focused on:

1. Partnerships

In a partnership context, make sure that all property and land is partnership property. This is a significant and important exercise in satisfying s105(1)(a), IHTA 1984 and achieving the 100% BPR that is applied to “property consisting of a business or interest in a business”.

The typical problem arising is that land is normally owned personally by the partners and is farmed by the partnership informally, and in this instance only 50% relief would be available on the value of that land under s105(1)(d), IHTA 1984 as stated in s104(1)(b). APR may still be available and should be considered carefully where land has hope value.

To ensure that the property owned falls within s105(1)(a) and attracts 100% relief, typically you should take two steps in your capacity as an adviser:

  • include all of the land on the balance sheet of the partnership; and
  • advise on updating or drawing up a partnership agreement, scheduling the business property. 

You will often hear reference to the case Ham v Bell [2016] EWHC 1791 (Ch) with respect to this matter, which looked closely at determining partnership property.

It is advisable to think carefully about which solicitor draws up a legal document, as if they have never done this for a farm the cost to the client may be excessive. Of course, there is generally an existing solicitor relationship, but you should still consider if they have the expertise or if loyalty is worth the cost or possibly even an incorrect agreement. You should also make sure that any such agreement would not cause problems for APR, which relies on achieving vacant possession of the land within a certain timescale. You should be careful not to ‘break’ the APR position with this exercise.

2. Trade v investment

The trade/investment balance is a commonly understood concept that broadly says trade is good, investment is bad (looking through a taxation lens). In a farming context the focus should first be on what activities qualify as a trade (the main operation of the farm) and second, how significant the diversification activities are that might threaten the position (as happens increasingly often). The case often cited in dealing with this concept is that of Brander (Representative of the Fourth Earl of Balfour) v HMRC [2010] UKUT 300 (TC), which concerned a 2,000-acre landed estate with a lot of diversified income.

It is important to note the way around this relief works (which differs from CGT); in order to fail to get the relief, the business must be shown to be 'wholly or mainly of one or more of the following, that is to say, dealing in securities, stocks or shares, land or buildings or making or holding investments' (s105(3)). So the starting point is that relief is available, and this puts the taxpayer in a stronger position. It’s hard to say where the line is, but the Balfour case shows that there is absolutely a case to be made that diversified activities on land, which on their own would fail to achieve relief, can be included as part of the whole farm as ancillary activities and enjoy relief at 100% with everything else.

Inheritance tax: APR

APR is a relief specific to the agricultural sector and relief is given on the basis of ss115–124C, IHTA 1984. Broadly you can apply APR on agricultural property where (s117):

  • it was occupied by the transferor and used for the purposes of agriculture for the last two years; or
  • it was owned by the transferor and used for the purposes of agriculture for the last seven years.

Once the hurdle of time period is cleared, the actual test for relief comes in s116, IHTA 1984 which in essence requires that for 100% APR the transferor either has vacant possession of the land or can get it within 12 months. Where the land is farmed in partnership, this may be achieved with a simple clause in the partnership agreement specifying rights of vacant possession.

Even if there is no vacant possession, 100% relief is available under s116(2)(c) if the land is let on a tenancy which began on or after 1 September 1995. Steps can be taken to achieve 100% APR even on older tenancies. For example, it is possible to convert an ‘old style’ tenancy (only attracting 50% APR) into one that will qualify for 100%, by re-issuing the tenancy and satisfying conditions laid out in Extra Statutory Concession D39, but this carries its own practical considerations.

‘Agriculture’ is defined in s115 as 'agricultural land or pasture and includes woodland and any building used in connection with the intensive rearing of livestock or fish if the woodland or building is occupied with agricultural land or pasture and the occupation is ancillary to that of the agricultural land or pasture; and also includes such cottages, farm buildings and farmhouses, together with the land occupied with them, as are of a character appropriate to the property'.

The question is, when should you look at APR when BPR is already available? The answer is when the landowner has either failed to achieve 100% BPR as described on the previous page (relatively rare now) or has ceased to become actively involved in the farm and let out land under a farm business tenancy.

CGT: entrepreneurs’ relief

Full in hand farming Grazing licenses /
producing hay /
livery yards  
Land let out under a farm business tenancy 
 ER succeeds   ER fails

Entrepreneurs’ relief (ER) is, again, not specific to farming and is widely utilised in all trading contexts. The trouble for farmers is in determining that a trade is taking place. There is somewhat of a spectrum of farmers and you will be challenged by those in the middle of the spectrum (see example above).

The often complicated and unclear middle ground is where specialist knowledge of farming becomes valuable. There are steps that should be taken to ensure that your client fully understands the pitfalls if they fall into this category and it is important to understand that the area is far from clear-cut. There are many cases in law for reference.

Where BPR requires that, for the relief to fail, a business be shown to be wholly that of making investments, ER is opposite in that it requires positive satisfaction of a trading condition and therefore scrutiny here is heavier.

Without going into this very complex area in too much detail, the general concept to keep in mind is how involved or ‘hands on’ the farmer is. Individuals owning land are often very ‘hands off’ but expect to receive generous reliefs because they are involved in farming in some way.

There are steps that you as an adviser can suggest, but ultimately, they are all suggestions depending on how much the individual is prepared to change the arrangements. For example, you might have a client with a DIY livery yard who may (with the carrot of tax saving) be prepared to work on the yard, mucking out stables and so on, for a year in order to satisfy the trading condition for the required timescale. The work must be genuine; and be aware of the possible VAT implications of such changes.

CGT: gift hold-over relief

Gift hold-over relief is commonly used in all trading contexts. This is a CGT relief that has additional provision for agricultural land. This is dealt with in the Sch 7, Taxation of Chargeable Gains Act 1992 and in effect states that holdover is available for agricultural land, so long as that land would have qualified for APR at the time of the gift. This additional flexibility on agricultural land can be very valuable.

About the author
Wayne Glenton is director of agriculture at Bulley Davey in Peterborough