Recent figures show the tax take from soft targets – stamp duty and inheritance tax (IHT) – could soon top returns for the Treasury from the ‘sin’ taxes on tobacco and alcohol. This is partly because the coalition Government failed to live up to a Conservative party commitment to raise the IHT threshold to reflect the impact of years of inflation on property values. This was dropped; instead HMRC is adopting an aggressive approach towards IHT, challenging assumptions that assets will be eligible for agricultural property or business property relief.
HMRC sees a dwelling house on a farm as a substantial potential source of IHT if its farming status can be challenged. When estates are being settled it’s using the appropriateness test to establish whether the house reflects the size of the farm, particularly if land’s been sold or rented out long term. This is about the scale of the farming business rather than the area of land, in that an intensive pig or poultry unit can be a business without a lot of land. What’s now clear is that when estates are being settled the first reaction of HMRC is to challenge the availability of agricultural property relief – something for which families need to be ready, regardless of how successful they believe their estate planning to be.
Farming property is also being caught up in attempts by the HMRC to prevent abuses of the system by companies or wealthy individuals.
An example is holiday lets and availability of business property relief. The crackdown by HMRC is on personal use of such properties – eg a city dweller with a holiday cottage they claim is available for rent, but which is rarely, if ever, commercially let. This shouldn’t be an issue in farming, where the holiday let location makes it unlikely the family would want private use, but you may need to prove you’re actively in the letting business. The property must be available for rent 210 days a year, and let for half of that, unless you can prove why, because of weather or other issues, this wasn’t possible.
The latest challenge to farm dwellings relates to limited companies. In 2013 the Government imposed an annual tax on dwellings owned by companies and some partnerships, known as the annual tax on enveloped dwellings. This was to prevent investment vehicles buying property through offshore companies to avoid stamp duty. The value at which the annual tax begins has been reduced from £2 million to just £500,000 from April 2015. The annual tax begins at £3,500 for properties valued at up to £1m, then rising on a sliding scale. HMRC may challenge valuations, but most farming businesses should be able to secure an exemption from the tax.
This is part of an approach by HMRC and the Treasury to increase revenues while leaving basic tax rates unchanged. Farming businesses were once unattractive because of the assumption that agricultural property relief would take the estate out of the scope of IHT. With this now being challenged on as many fronts as HMRC can muster, it pays to be aware of this and to plan accordingly. With IHT running at 40% on assets above just £325,000 thanks to the Government’s refusal to increase this in line with years of inflation, this is a mean-spirited tax on families hoping to pass on assets to the next generation.