Landowners need to structure occupation agreements correctly to avoid inheritance tax hit
29th November 2022
Farms and estates that have set up contract farming, share farming and grazing agreements should urgently review them to avoid losing out on valuable tax reliefs, warns Tom Heathcote, Head of Knight Frank’s Agri-Consultancy team.
“Such agreements should rightly always be in the spirit of the law, but Jeremy’s Hunt’s Autumn Statement means it is more important than ever to ensure they are worded and actively managed correctly,” urges Tom.
As part of the statement, Mr Hunt announced significant extra resources for His Majesty’s Revenue & Customs to allow it to target those using complicated tax-planning structures to mitigate their liabilities.
Agricultural Property Relief (APR) and Business Property Relief (BPR) are widely and totally legitimately used by land-owning families to enable farms and estates to be passed on to the next generation without paying inheritance tax.
However, property assets such as buy-to-let residential portfolios or tenanted agricultural land generally do not qualify for BPR or 100% APR because they are considered to be investments, not business assets.
This means many landowners who do not farm their land themselves for whatever reason use contract farming and share farming arrangements, instead of traditional rental agreements, to protect their inheritance tax reliefs.
When structured correctly, such arrangements are entirely legitimate, but not all of them are robust enough to satisfy HMRC, warns Tom.
“HMRC has always been on the lookout for sham agreements that are basically tenancies by another name and these extra resources will enable them to scrutinise more inheritance tax claims in greater detail,” he says.
“The crucial aspect to get right is that the landowner and the entity doing the actual farming have to share some of the business risk associated with growing a crop or rearing livestock. That means genuinely splitting input costs and profits, not just swapping cheques,” explains Tom.