One of the biggest concerns that any farmer could eventually face is when they decide to pass on their farm to the next generation.
In practical terms this may be easy enough to arrange, but the family succession plan needs to be carefully thought through. Planning should start as early as possible, because there are a number of tax issues to be considered to ensure the process is a success.
The main issue around making a transfer of assets during lifetime isn’t always inheritance tax, as many might anticipate, but rather capital gains tax.
This is because the transfer of any asset is a capital disposal which can give rise to a capital gain if the asset has grown in value and the book cost is low. Any resulting tax liability, without having any cash proceeds, can result in a costly tax sting in the tail – especially when family money is all tied up in the business.
Having said that, farmers can generally take advantage of some capital gains tax reliefs as agricultural land which qualifies for Agricultural Property Relief can usually be given away without liability to capital gains tax being incurred.
The gain treated as arising on a gift of agricultural land can be ‘held over’ to the transferee, so that the transferee takes the land at the transferor’s original cost price. However, care is required when farmhouses, let land, properties and recently acquired land are being transferred, as it may not always be possible to transfer these assets without a capital gains tax charge.
HM Revenue and Customs states that most lifetime transfers between individuals are potentially exempt transfers (PETs) for inheritance tax purposes and will become exempt if the individual making the gift survives for a period of seven years.
But while this sounds like good news, problems can arise if the transferor dies within seven years of making the PET, as inheritance tax could then be payable, unless Business Property Relief and Agricultural Property Relief still apply.
In order to obtain Business Property Relief and Agricultural Property Relief on a lifetime gift where the transferor has died within seven years, the transferee must have retained the asset and the asset must still qualify for these reliefs by reference to the transferee.
Inheritance tax problems can therefore arise where the agricultural land has not been retained and farmed by the transferee.
Overall, the gifting of a farm to the next generation can be a complex area of tax, as every farm and family arrangement will be different. Professional advice should therefore be sought so that the various tax issues can be carefully considered and the resulting disclosures are correctly made to HMRC.
Alan Stewart is a tax partner at A berdeen-based chartered accountancy practice Meston Reid & Co
