Tax Planning

Succession is a major concern for landed estates and passing on the asset to the next generation requires a great deal of thought and planning. Inheritance Tax (IHT) is significant, at 40%, therefore agriculture presents one of the best opportunities to secure tax reliefs, in order to preserve the asset as the baton is passed on. Whilst the reliefs available are valuable tools, considerable forward planning is required in order to take advantage of them.

The Balfour Case has come to be regarded as the basis for much estate IHT planning strategy. Despite the fact that it is now nearly 10 years since the Upper Tax Tribunal’s decision in the Balfour Case, very little case law has been created since to help guide the decision-making process.

In broad terms, it is advisable to structure the composite business of an estate in a way that the majority of its activities are regarded as trading as opposed to investment. To quantify this, more than 50% of the asset value, management time, profit and turnover need to be related to enterprises which are classed as trading (e.g. in hand farming) as opposed to those which are classed as investment (e.g. let property). If this can be achieved then potentially 100% of the assets qualify for Business Property Relief (BPR).

Lord Balfour’s estate covered 1,907 acres and comprised two in hand farms, three let farms, 26 let cottages, two let commercial units and various woodlands, parks and sporting rights. It was successfully argued, at appeal, that the Estate should be regarded as a composite, and that the activities of the composite were predominantly trading.

For many farms and estates, Contract Farming Agreements (CFAs) have become useful arrangements to farm in hand, using contractors. In principle, the contractor provides a degree of management, labour and machinery and the landowner, who is now deemed to be the farmer, provides all of the inputs and is in charge of the business. The contractor provides his services for a fixed fee and profits are divided according to a pre-agreed contract.