Changes in the Tax Landscape for rural clients
Following Brexit, the UK government now has the scope to change farming policy and the whole way in which land is used.
With buzz phrases like “food security” becoming a regular feature in our media landscape, this topic is fast becoming one to watch for possible challenges but also further tax planning opportunities for our clients, highlighting the importance of keeping up to date on tax planning changes.
Utilising Agricultural Property Relief (APR) as part of an estate planning process can be hugely tax efficient for farming families and landowners when looking at succession planning.
Concerns raised by tax advisers and industry representatives have been recognised and the Government launched its consultation, ‘Taxation of Environmental Land Management and Ecosystem Service Markets’ as part of the wider review to expand the scope of Agricultural Property Relief for inheritance tax purposes.
The consultation, which ended on the 9 June, has been widely welcomed to address the limitations of Agricultural Property Relief as it currently stands, how it can be a potential barrier to some agricultural landowners and farmers, especially for those businesses looking to diversify to keep up with modern demands.
Back to basics - APR
There is no formal definition of ‘agriculture’ in the inheritance tax Act 1984. Agriculture is defined by HM Revenue and Customs specifically for inheritance tax purposes as including “horticulture, fruit growing, seed growing, dairy farming and livestock breeding and keeping, the use of land as grazing land, meadowland, osier land, market gardens and nursery grounds, and the use of land for woodlands where that use is ancillary to the farming of land for other agricultural purposes”. This definition is not exhaustive and has been expanded to include vineyards cultivated for the production of wine.
If clients satisfy the above requirements, APR can apply to 100% of the agricultural value and can therefore make it possible to pass these qualifying assets to non-exempt beneficiaries.
Satisfying the requirements for APR can be difficult though. In the case of Thomas Gill (deceased) v HMRC 2019 UKFTT 0650 (TC), in the First Tier Tribunal (FTT), the deceased died owning Woodlands Farm. He allowed farmers to graze their livestock on his land under annual grazing licenses and the deceased’s executors claimed APR.
One of the witnesses said, “he looks like an old farmer, dressed and spoke like an old farmer, he acted like and was an old farmer”. Although APR was initially refused, the tribunal looked at the property as a whole, taking a wide interpretation of “for the purposes of agriculture”. The FTT found that Mr Gill carried out the duties of a farmer, even though he did not own livestock on his farm, and APR was applied.
Changing landscapes for our clients
Due to the global stressed economic situation, many farmers and businesses are reviewing efficiencies of their rural enterprises and decisions are being made for economic reasons to improve bottom lines. We have seen diversification become a more prominent feature in rural communities to try and generate income. In some circumstances, this has had adverse inheritance tax consequences because the diversification has meant that the asset no longer qualifies for APR meaning that the family have increased inheritance tax liabilities.
Taxation of environmental land management – government consultation
The government currently state that the primary purpose of farming is food production but that farmers also play a “crucial role” in “protecting and enhancing the natural environment”. This has been the case for many years, as seen through the availability of various grants and schemes to encourage farmers to maintain their land and preserve the land for the long term.
The consultation is divided into the taxation of environmental land management and ecosystem service markets. The government are looking at introducing three environmental land management schemes including the Sustainable Farm Incentive, Countryside Stewardship and Landscape Recovery to support the delivery of our net zero target and other environmental goals.
The government are now looking to expand the remit of APR to cover the types of environmental land management they are seeking rural landowners to implement.
It’s our responsibility as advisers to ensure clients take a step back and review the wider tax consequences of their plans. The government’s response following the consultation is greatly anticipated by rural clients and tax advisors because it may widen the net for more tax planning opportunities for our clients.
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