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Farm Complacency - Active Husbandry With The Surviving Spouse Exemption

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Julie Butler - Expert Author

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4 June  2013

Farms are invariably run as family farming partnerships, often a husband and wife and their children. In a large number of cases the land is still held in the names of the parents and often, as is the way with farming, just in the name of the father. The recent announcement of the consultation into “mixed partnerships” on 21 May and news that we should hear more on CAP Reform after June 2013 will put all farm partnerships under review, especially where a “corporate partner” has been introduced.

Active farming

A large amount of work is often carried out to make sure that the farm operation will be inheritance tax (IHT) efficient, that there is active involvement, active husbandry, evidence of a farming operation etc. Very simple Wills are often produced whereby the husband leaves his wealth to his wife and vice versa. Statistics would show that it is often the husband who dies first.

Surviving spouse as first protection

In the situations mentioned above, a large number of farms inherited originally by the son have been passed to the wife without any IHT problems due to the surviving spouse exemption. The first point is the lack of utilisation of APR and BPR by using the surviving spouse exemption. The Deed of Variation (D of V) is one of the tax planning tools to be considered to protect APR and BPR. The problem then arises with regard to the farmer’s wife. Such a scenario might sound sexist but in the history of farming over the last century it has invariably been the case that farms are left to sons, that it is the husband who is the most involved in the farming and it is the husband who dies first.

Ageing population of farmers

Currently a large number of UK farms are owned by an ageing population of farmers. Although a lot more young are entering the farming industry, it is considered by many that the majority of UK farms are still owned by the elderly and very elderly. Very few have passed the farm down to the next generation and the fact that when they die the farm is passed to their wife ‘free of tax’ through the surviving spouse exemption seems a very simple and straightforward move. However, a large number of advisers are now faced with the position that the wife has inherited or will inherit a farm that might then present IHT problems for her with regard to qualification as an “active farmer”. The recent aggressive approach by HMRC to tax and agriculture has helped tax advisers form the view that there are effectively “working farmer” rules introduced by the enquiry approach.

Last two years

With the continual attack by HMRC on active involvement for Business Property Relief (BPR), the review of the last two years can highlight considerable problems. A lot of work has been put into making sure that “Farmer Giles” does achieve IHT relief on the farm and also associated investment assets such as the cottages. It might prove more difficult for “Farmer Georgina” to prove the active involvement which HMRC are so insistent upon in BPR claims and likewise for the claim for Agricultural Property Relief (APR) and the farmhouse. Many question why BPR is needed and APR will not suffice and the answer is because of potential and actual development land, let cottages and diversified projects. There is also a worry the APR could disappear in the future.

Review of all farming Wills

The practical tip is that all farming Wills should be reviewed. Perhaps that will expose an even larger problem – potential intestacy where there is no Will. The consideration to pass business assets to the next generation using BPR and/or APR on the first death should be given prime consideration. Protection can be sought through the Deed of Variation so that assets that do achieve APR or BPR can be passed down and those assets that do not can be passed to the surviving spouse to take advantage of all the reliefs.

Complacency over the surviving spouse exemption

This is not just a potential problem, it is an actual problem. There are farming wives who have inherited the farm who would have difficulty in arguing active involvement and this situation should be reviewed now. If there is still time for a Deed of Variation then act now if there are concerns over whether active involvement can be proved for BPR and active husbandry for the APR needed for the farmhouse.

Legal Agreements

So many farming partnerships lack up-to-date legal documents such as Partnership Agreements, Contract Farming Agreements and Grazing Agreements. Now is the time for a total review of all the important farm legal documentation and agreements. Farm values have increased substantially in the last decade, development values are returning, HMRC’s appetite for collecting more inheritance tax seems as keen as ever and convincing the Capital Taxes Office that a spouse who is not involved in active husbandry is entitled to BPR and APR on the farmhouse. Many advisers seem to be focusing on aspects of farm tax planning such as the main farming spouse while overlooking the surviving spouse. It is essential to consider the basics of up-to-date Wills, with a look at the role of the spouse and farming to include timely use of the Deed of Variation and protection through the Partnership Agreement etc. If mistakes are made or opportunities overlooked the quantum of the tax penalty could be very significant with current farm values.

Practical tip

With so many changes to farming resulting in updated Wills, Partnership Agreements and tenancies, now is the time to consider if Wills which take a complacent approach of the simple “surviving spouse” route should look at greater protection from existing APR/BPR to pass down to the next generation on death.


About the Author

Supplied by Julie Butler F.C.A. Butler & Co, Bennett House, The Dean, Alresford, Hampshire, SO24 9BH.  Tel: 01962 735544.  Email; j.butler@butler-co.co.uk, Website; www.butler-co.co.uk

Julie Butler F.C.A. is the author of Tax Planning for Farm and Land Diversification (Bloomsbury Professional), Equine Tax Planning ISBN: 0406966540, and Stanley: Taxation of Farmers and Landowners (LexisNexis).



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Article Published/Sorted/Amended on Scopulus 2013-12-06 09:12:24 in Tax Articles

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