Farming families who have no intention to develop buildings could possibly be caught for extra IHT on death as a result of these changes. There will of course be lifetime disposal considerations for the family. As most farming families trade as a partnership, the task of ascertaining how the property is owned will be a key step forward. For non-farming advisers this might sound obvious but often if Entrepreneurs’ Relief will be needed on disposals there must be planning to ensure all the criteria are met.
Agriculture Property Relief (APR) for inheritance tax is restricted to Agricultural Value. Any element of market value above APR needs to be protected by Business Property Relief (BPR). With the current changes to planning rules for agricultural buildings it can be argued that all agricultural buildings now have potential development value.
The changes arise from the publication of the government’s long-awaited changes to the Town and Country Planning (General Permitted Development) Order, which allows the conversion of up to three dwellings with a maximum combined floor area of 450sq m. However, there are a number of qualifying criteria within the new order and one of the most important is that buildings for conversion to dwellings should have been in agricultural use on 20 March 2013. An essential criteria for farmers will be ensuring the Local Planning Authority (LPA) do not have an opportunity to say that the building is not in agricultural use. This may sound simple, but any buildings in equestrian use or let out for storage or other non-agricultural uses will not qualify for these relaxed planning rules. In addition, the rules do not apply to buildings in areas of outstanding natural beauty (AONB) nor in national parks.
No intention to develop
Planning potential is an area that advisers will not be able to ignore in 2014. The positives are that in reviewing this problem there could be solutions to other farm tax problems, eg ensuring there is an up-to-date Partnership Agreement.
The need to join up the fundamental tax planning with possible planning permission opportunities
Clearly with all the potential for increased development opportunity the ‘property portfolio’ of any farm needs to be reviewed. This is not restricted to what currently counts as a dwelling but what could count as a dwelling in the future. There is a need for a review of farmhouse eligibility for APR and this should be expanded to a total review of properties for ownership/occupation criteria to meet the demands of potential APR and PPR. Such review is of particular importance post Hanson – Revenue & Customs Commissioners v Joseph Nicholas Hanson (Trustee of William Hanson 1957 Settlement)  UKUT 0224 (TCC) when the nexus for character appropriate was decided to common occupation not common ownership.
There is much scope and need for the farming community to review all planning permission and tax planning opportunities around the new Permitted Development rules.
Principal Private Residence Relief (PPR)
One obvious benefit to the farming family will be the increase in the opportunity for dwellings resulting from the Permitted Development rules. Such potential development could lead to the selling of the main farmhouse and achieving a “tax free” gain on disposal using the principal private residence relief (PPR). Other advantages are that the older generation will be able to ‘downsize’ to a property that will suit their needs in the ‘twilight years’. PPR will undoubtedly prove to be a useful tax planning tool for the farming community in the years ahead as advantage is taken of increased residential development opportunities.
Where there are concerns over the large farmhouse and the eligibility thereof for APR, eg queries over the size of the farmhouse not being of a character appropriate to the land, the ability of moving to a smaller more functional farmhouse could have IHT benefits. There is no doubt that PPR could help release funds to the family in a tax efficient manner.
Reproduced by kind permission of LawSkills Ltd from their website (www.lawskills.co.uk). A site dedicated to helping Private Client Practitioners.