The University of Exeter’s recent survey, commissioned by NFU Mutual, has found that less than a fifth of farmers plan on fully retiring. As a farmer’s daughter, I am not surprised. For many farmers, farming is so much more than a job or career: it is a way of life, an identity, and often in their blood. The land gets under your skin as surely as the soil gets under your finger nails – and is just as deeply engrained…
That said, not planning to retire should not mean not planning for the future. This is particularly the case where it is intended that the farm be passed down to the next generation. While there are currently generous reliefs in place in the form of Agricultural Property Relief (APR) and Business Property Relief (BPR) to shield farming interests from inheritance tax, these reliefs have a variety of quirks, which are just as capable of tripping up the unwary farmer as an icy collecting yard on a December morning. It is crucial to understand (a) what impact a change or reduction in farming activity can have on APR and BPR and (b) sensible planning which can be put in place to protect and maximise the reliefs and enable the farm to be passed on to the next generation in good shape.
How do the reliefs work? 
100% BPR is available on qualifying business property, which includes in this context, a farming business (operated as a sole trade or in partnership), unquoted shares in a farming business or assets used in (and held as assets of) a farming business provided such property has been held for two years and the business does not consist wholly or mainly of holding investments (i.e. it is a trading rather than investment business under the inheritance tax rules). 50% relief is available in relation to land or machinery owned personally but used for the purposes of the business.
100% APR is available on the agricultural value of qualifying assets if the assets are farmed by the owner or let on a tenancy that began on or after 1 September 1995, while 50% relief is available in other cases. Where the land is farmed ‘in-hand’ the land must have been held for two years in order to qualify for APR; where the land is rented out the length of ownership requirement is increased to seven years. In the event that assets are eligible for both APR and BPR, APR applies in priority to BPR, although BPR may be applied to the difference in value between the agricultural value of an asset and its market value.
Thinking of winding down or diversifying? 
While the majority of farmers will wish to continue farming in some form for the rest of their lives, few will intend to continue with daily 4am starts in the milking parlour or 12 hour shifts on the combine forever. Diversifying into alternative land use such as renting out land for the grazing of horses or converting old barns into office space may make good sense if no longer required within the farming business, but it is worth understanding the potential inheritance tax implications of such diversification. To qualify for APR, land must be used for the purposes of agriculture, a condition not fulfilled by the grazing of horses or office rental. It is also unlikely that BPR would apply to such activity. While this would not prevent BPR from applying to the whole farming business if such investment activity represented less than 50% of the farming business, if the scales were to tip in favour of the holding of investments over trading, BPR could be lost on the entire farming business. The balance of the business should be reviewed regularly and prior to any proposed diversification project. A watchful eye should be kept on reports published by the Office of Tax Simplification which suggest the trading threshold for BPR may yet be aligned with relevant tests for CGT i.e. 80%, not 51% trading.
How are the farming assets owned? 
Where a farmer farms through a company or partnership structure but owns assets used by the company or partnership in his own name, such assets only qualify for the 50% rate of BPR, compared to the 100% rate if held within the company or partnership. Thought should be given to contributing such assets to the business to double up the IHT relief, subject to checking the CGT and SDLT position (which can depend on who/what entities are involved in the business). If the business is operated through a family partnership this can often be achieved without CGT or SDLT implications.
Passing assets down to the next generation 
Capital gains tax hold over relief applies to APR and BPR qualifying assets, meaning that a farmer could pass assets which had increased in value down to the next generation without triggering a capital gains tax charge on the gift. Instead the recipient of the asset would acquire it at the farmer’s base cost. This valuable relief may make the prospect of lifetime gifting considerably more attractive.

The ownership of specific assets is particularly relevant where the farmer wishes to pass shares in his farming company down to the next generation in his lifetime. If, by gifting shares, his shareholding is reduced to 50% or less, he is no longer deemed to control the company and as a result personally owned assets used by the company would no longer qualify for BPR at all.
When gifting assets qualifying for APR or BPR in his lifetime, a farmer (and arguably more importantly the recipients of such gifts) should also be aware of the potential for the reliefs to be clawed back and inheritance tax payable if the farmer dies within seven years of making the gift and the gifted assets no longer qualify for APR or BPR at the time of his death.
The Farmhouse 
A farmhouse may qualify for APR (BPR is very challenging to secure) if occupied by a farmer who directs the day to day farming activities from there. As a farmer winds down his farming business, perhaps relying more on land agents to manage the farming activities or renting more land out to tenants, he becomes less likely to be considered to be the person farming the land on a day to day basis, so potentially jeopardising a claim to APR on the farmhouse. If the intention is for the farmer to move out of the farmhouse to make way for the next generation, careful thought should be given to the timing of such a move to ensure, where possible, that the gift of the farmhouse benefits from APR.
Losing capacity 
While a farmer may fully intend to die in his wellies, life might not work out that way, and a stroke, illness or accident could leave him incapacitated. In such a situation, cows will still need to be milked, crops harvested and bills paid. It is worth considering having additional signatories on the farming business’s bank accounts for such an eventuality, as well as putting in place lasting powers of attorney in favour of trusted family members or friends so that they can step into the breach to keep the wheels turning should the farmer lose capacity.
Making a Will 
Even if the farmer has no intention of handing over the keys to the milking parlour, combine or farmhouse in his lifetime, he should still consider what he would like to happen to the farm on his death and make sure he has a Will in place to give effect to his wishes in a tax-efficient manner.
While it may be daunting to look into the future and consider a time when ‘hands on’ farming is no longer possible or desirable, understanding the implications of and planning for such an eventuality should ultimately strengthen the farming business, both today and for the next generation.