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Farmers Must Not Retire - Attack on the last two years


Julie Butler - Expert Author

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14 November 2012

There are many elderly farmers in the UK and the vast majority are relying on the current legislation to enable them to pass the farm to the next generation “inheritance tax free” bar a few well established tax hurdles introduced by HMRC to deny inheritance tax (IHT) relief.

These “hurdles” are for example:

  • The disallowance of part of the claim for the farmhouse (difference between market value and agricultural value),
  • Cash savings and investments not part of the farm working capital,
  • Private assets included in the farming business.

These factors are well understood and in many cases it is hoped that most of the above are covered by the £nil rate band or can be covered by the cash savings.

However, in recent years there have been changes to farming and the availability of IHT reliefs. Firstly, farmland values have increased – it is generally considered that farmland values have more than doubled since 2005. Secondly, the mode of farming has changed since 1984, there is increased capital intensity and basic farm machinery has increased in quality and cost. Thirdly, there has been an increasing enthusiasm for HMRC to deny Agricultural Property Relief (APR) and, surprisingly, this does include families with a long history of farming. It must not be forgotten that legislation dictates that HMRC look at two years before death not ten years ago or twenty years ago or the impressive history of farming in the family.

Those Last Two Years

Working on the farm in the last two years of the farmers life and for him maintain an active interest in managing the land is very difficult. In an ideal scenario members of the family will be brought into the farming partnership to help. “Modern farming” has changed over the last few decades – a new tractor can cost well in excess of £100,000. Therefore the small farm machinery sharing arrangements and the use of contractors becomes inevitable. If there are no successors there must be farming agreements in place to protect both APR and Business Property Relief (BPR). The farmer must be engaged in a sufficient degree of activity to qualify for APR and BPR. Many elderly farmers in recent years have “given up” in the few years before death; their state of health prevents them from doing anything other than collecting pensions and the single farm payment. APR claims in these scenarios have been under attack and the denial of APR has come as a shock for both the beneficiaries and the advisers. Often no advice has been given about not retiring, not ceasing agricultural occupation, not stopping to be actively involved in the farm operation. The farmer must not retire – the income tax returns and accounts for the last two years must show involvement in the trade of farming. These attacks on the right to APR must be vigorously defended.

Active involvement for the elderly famer - Farming through partnership with next generation.

An ideal scenario is to continue with the family but what if the family is not committed to farming? A family member in partnership, to cope with all modern farming has to throw at the elderly farmer e.g. grants, paper works, high capital cost and work with “farming with contractors”, maintains active involvement but it is essential to evidence the use of the farmhouse.

Farming with Contractors

It is often necessary to use “boys with big farming toys” in order to help with the cost of machinery. The young generation from one farm will often carry out contracting work for each other so that they too can support the family farm. Farms with contractors when the farmer makes all the decisions clearly shows control but again there must be evidence of use of the farmhouse. Many elderly farmers have, however, found the organisation of separate contractors too complicated and therefore the move to contract farming arrangements is considered.

Contract farming arrangement

This subject is well documented and they should ensure there is risk and involvement as the basics, and as shown in Arnander (Arnander (Executors of) McKenna Deceased 2006 SPC 565), there should be evidence of use of the farmhouse and evidence of involvement in the farm – and yes put evidence of the farming occupation in the obituary. HMRC will look at all recent documentation.

Grazing Agreements

Again much has been written about grazing agreements and the importance of being more than a landlord for BPR – see McCall v HMRC (2009) NICA12, and the importance of the “hotel for cattle” as opposed to a grazing licence simply to increase income which is regarded as an investment activity. Who grows the crop of grass is important as this is deemed a trading agricultural activity. The key point in this case is had the farmer arranged for fertilizing the land and looking after the cattle the ability to claim BPR would be far more strong. The farmer ideally should remain in occupation of the land, involved in the land management, the growing of the crop of grass and have responsibility for the livestock. If the land has any element of development value and would need BPR then grazing agreements and contract farming agreements are very risky – the more positive arrange through a partnership and the use of specific contractors is preferred to maximise IHT relief and meet the criteria of involvement, occupation, control, activity and yes growing the crop of grass including fertilizing.

Action Plan

Farmers must not retire nor delegate the activity to such a degree that IHT reliefs are put at risk due to lack of active involvement. All elderly farmers, especially those without interested family and beneficiaries, must continue to carry on active husbandry to be sure of protecting the current IHT reliefs available.

The UK has a very elderly population and more of these problems have not come to light because the farmers are still alive not due to the enthusiasm of HMRC to deny APR and BPR where their interpretation of the rules has not been applied. It is time for the family and their advisers to act now. All IHT claims for farmers and landowners will be looked at – those farmers who have to go to a nursing home should be considered.

About the Author

Supplied by Julie Butler F.C.A. Butler & Co, Bennett House, The Dean, Alresford, Hampshire, SO24 9BH.  Tel: 01962 735544.  Email;, Website;

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 2013-01-23 09:05:04 in Tax Articles

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