Inheritance Tax and tenanted land

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George is having a cuppa at the farmhouse kitchen when David walks in and throws down his notebook.

George: Ah, was just thinking about you … how did the meeting go with the accountants at Ensors? 

David (pours himself a cup):  Good and bad news grandad.

George: Here we go …

David: The good is news is our accounts are looking quite healthy in the circumstances and in comparison to quite a few others. Although the land prices have slopped a bit in recent months we are still in a strong position.

George: So what’s the bad?

David: This could give us a quite a big Inheritance Tax problem. 

George: Why? Our land is all proper farmland and this is a partnership farm so doesn’t it get that agricultural relief?.

Henry (walks in): What’s this?

David: Ensors have just confirmed that the land does indeed qualify for Agricultural Property Relief, or APR.

Henry: Ah good news!

David: Hang on dad, the problem is with the rate of relief on the tenanted land.  It might only cover 50% of the value.

Henry: Not my land? That’s all owned by me and farmed by the partnership. 

David (checks notes): That’s right, it does all qualify for APR at 100%. 

Henry: So?

David: The accountants are focusing on the 250 acres which Uncle John owns … how long’s he had it?

Henry (thinks): Great Uncle Albert died in the late eighties leaving quite a bit to John and I. John bought 250 acres plus his first house with it and I bought the other 500 acres. But this is irrelevant surely as John’s never been interested in farming, has he dad?

George: I blame it on that school teacher of his, putting fancy ideas into his head …

Henry (interrupts): John just leased the land to Grandad and we pay him rent, but the partnership has always farmed it, along with my land. We agreed, the farmland stays in the family and as John and Sarah have no kids their Wills leave it to me.

David: Yes, and that’s the problem.

Henry: But we sorted this in the nineties. There was mention of Inheritance Tax problems on that land, something about having to wait seven years to get the APR because John was a landowner and not a farmer. But that seven years has long passed so we’re OK ….

David: Unfortunately not Dad. The accountants said that while he is entitled to APR, this is only at the rate of 50% where the land is tenanted, the lease giving the farmer the legal right of occupation was signed before 1 September 1995 AND it has at least two years left to run at the relevant time.

Henry:  How annoying; the lease we have meets all three. And with the land values being what they are…

(They fall quiet)

George: Come to think of it, the 100 acres I own is let on one of those old tenancies too. And I bought that in 1975.  But I’m sure I was told something about a double discount….

Henry: Oh yes!

David (nods): Ensors mentioned a 'working farmer’ relief that applies to land owned before 10 March 1981 provided certain conditions are met, like time limits and the amount of time engaged in farming. If that applies, 100% relief could be due. They suggest a review.

George:  Good idea.  

Henry (thinking): But what about John’s land? That’s the bigger problem and it was definitely acquired later than 1981.

David: Not only that Dad but part of it is within the local plan. In the long term there might be some development value.

George: None of this would be a problem if John had come into farming like the rest of us, would it?

David: Agreed. If he farmed on his own all of his problems would be solved. Ensors said that 100% APR applies to land farmed by the owner once it’s been owned for more than two years. And in that situation, business relief should cover the development value. But we would need to get rid of the tenancy to the partnership first.

Henry: Hang on, didn’t you say the problem is just with the old tenancies?

David: Yup. Ensors also said that if agricultural tenancies were granted on or after September 1 1995 then tenanted land still gets 100% APR …

Henry opens his mouth and closes it again.

David: Provided the land has been owned for long enough, of course.  Doesn’t help with the development value issue though …

Henry: So we just need to get John to replace the old tenancy with a new one.  I’m sure he’d help if it saves tax and avoids having to sell land.

David: The accountants mentioned it’s a possibility. But then there’s the age old problem….

Henry (groans): Tax !

David: Yes. If you give up the existing tenancy it could have quite a high value and result in Capital Gains Tax.  Although the accountants suggest there may be a way around that. …

David: Well if anyone can help, Ensors can …

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