[Womble]

I was reading something today that alluded to there being no inheritance tax due on farms. It's kinda hard to tell, but could this also apply to smallholdings?

Could be quite a significant consideration for some folks on here if so. Can anyone advise?

http://www.hmrc.gov.uk/cto/customerguide/page17.htm

[doganjo]

I rather think HMRC would argue on that one.  Anyone can call themselves a smallholder. I could since I have ducks, chickens,vegetables and fruit, but my place is what most people would say is a very large garden with a bungalow in the middle.  I doubt if my property would be allowed to be inheritance tax exempt. I would be delighted if it was, and I'm sure my two kids would be even more delighted!  If however, I was able to buy some of the land in the field across the lane, and grow say weaners or lambs, then HMRC MIGHT consider that, although to be honest I would be very doubtful.
I think this is the crucial clause.

The relief applies only to the agricultural value of agricultural property. This is the value the property would have if it could only be used as agricultural property.

[Womble]

Actually, I don't see why that blows it out of the water. If I own a farm worth £500K (some hope!), but if I were to flatten it and build a hotel and golf course there instead, worth £1M, the clause above just means that I would only get IHT relief on the original agricultural value.

I agree that if it seems too good to be true then it probably is, but it would be worth finding out for definite how the rules might apply to an average smallholding.

[doganjo]

No, once the change of use had been allowed and the farm sold then it is no longer agricultural so there would be no relief whatsoever.  Believe me if there was a loophole here HMRC would know about it and block it.  I have tried over the years to get the better of the IR (as it was known when I was practising), and only rarely been successful.

[whitby_sam]

Interesting! I will ask my accountant and let you know what he says...

[Norfolk Newby]

When I bought my land, the solicitor mentioned that there is no tax PROVIDED you use the land to produce food. You would need records to show what food and how much (one carrot wouldn't qualify!).

So, farm land used to produce wood for burning (willow coppice, that sort of thing), set-aside land and similar non-food use would not qualify and the land would be subject to tax.

I don't have any more details than that so if you can get more information from your accountant, please share it here.

NN

[doganjo]

When I sold my house with 10 acres and a three part barn the new owners tried to reduce their liability to stamp duty saying that the land was agricultural - which it was as I had let it for grazing, and the barn housed my poultry, but HMRC said it couldn't be classed as separate from the house so they had to pay the full whack.  I suspect Inheritance Tax might wok the same way, but I would be very interested to know what criteria are applied.

[Roxy]

I have just been through this inheritance tax business.

We lived with my elderly uncle who died three years ago.  Me and my two brothers were left the farm.  As I wanted to pay out my brothers, the valuation was done as a probate one, and was in my opinion very high, and not in our favour, either for tax, or for me buying it. 

On the advice of our solicitor we tried to get the inheritance tax reduced by saying it was used for farming.  My uncle was retired, but the land was let to another farmer for summer grazing, which we have carried on.  This farmer had to send a letter confirming he rented the land for his cattle.

Eventually we did get a reduction in the inheritance tax on the land, but we have just paid out a lot of money as inheritance tax on the house and adjoining barn, which although sitting slap bang in the middle of the field, is not classes as part of the farm - even the barn which we argued held winter hay, was deemed part of the residential dwelling.

So, unless you have a farm with a big acreage, it seems unlikely it would be tax free.

I am pretty certain if we sell the farm, we will get done for capital gains too.

[doganjo]

I am pretty certain if we sell the farm, we will get done for capital gains too.

If it is your only residence you shouldn't do.  And there is a time limit of three years for selling a house after buying another one - in other words you won't pay CGT if you buy another house but can't sell the previous one right away.