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A quick guide to agricultural tax breaks

Agricultural relief can reduce the value of an estate by up to 100%, but the taxman’s strict rules mean clients will need advice to avoid coming a cropper

A quick guide to agricultural tax breaks

Whether it is real farmers bailing twine for a belt, or City slickers swapping the rat race for the countryside – some clients can reduce their tax burden through agricultural relief (AR).

AR reduces the value of a person’s estate by up to 100% of the agricultural value of land and associated buildings, such as the farmhouse, barns and byres. That is – provided these buildings are appropriate to the agricultural character of the land.

As the value of the land would otherwise be taxable at a rate of either 40% or 36%, some people choosing to invest in farmland could ensure their beneficiaries receive more of their assets.

The range of agricultural enterprise that qualify for AR is significant, but it must have agricultural purposes at its core. Rather generously, HM Revenue & Customs (HMRC) recently agreed to the extension of a tax relief to the cultivation of wine or cider, and the taxman is unlikely to contest the relief applied to land on which food is grown or seeds are sown.

In the same vein, owning a tomato patch or turning to horticulture could reduce the inheritance tax (IHT) liability of a farm. The relief is also allowable for more modern uses of agricultural land, such as short rotation coppice used to produce biofuels. HMRC guidance also confirms bio-energy crops, such as oil seed rape or wheat, may qualify for AR.

Along with farming and the production of food or flora, the government’s recognition of the importance of safeguarding the habitat of birds and animals is given substance by the extension of AR to land used for this purpose, provided it is part of a designated scheme.

Not just for show

However, claimants should exercise caution and seek advice on the relief’s applicability. HMRC carefully investigates any novel uses of the land to ensure they are suitably agricultural.

For example, AR has not been allowed where the land has been used to grow reeds for thatched roofs. The justification for denying the relief in this case was the owners merely cut the reeds, rather than cultivating and tilling the land.

HMRC has also denied the relief to land used for granting fishing rights and keeping animals for sport on the grounds, as these are not agricultural in nature. No theme parks, ‘pitch and put’, hang-glider launch sites or medieval jousting allowed.

Clients seeking relief should also note requirements for AR apply to specific activities. The rules explicitly include land used for the purposes of housing a stud farm. However, where AR is claimed on this basis, HMRC will conduct an investigation into the business’ activities to ensure the breeding of horses is carried out in a ‘systematic manner’. This investigation can include inspecting the business’ accounts over a number of years.

Where AR is not available, a client may be able to claim business relief to reduce the potential IHT liability. The scope of this relief is broader than AR but the taxpayer must prove the business is carried on for a gain and the assets in the business qualify for the relief.

While AR can be a useful tax relief, and one that allows the indulgence of an interest in the countryside, HMRC’s strict application of the rules means clients should seek advice to ensure their investment bears fruit.

Lynne Rowland is tax partner at Kingston Smith

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