Farm complacency, active husbandry with the surviving spouse exemption

 In Comment

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Tax planning for farmers wife

Farms are invariably run as family farming partnerships, often a husband and wife and their children. In a large number of cases the land is still held in the names of the parents and often, as is the way with farming, just in the name of the father. Sorry there is no sexism meant in this article – there is just a presentation of what happens in the farming world.

A large amount of work is often carried out to make sure that the farm operation will be IHT efficient, that there is active involvement, active husbandry, evidence of a farming operation etc. Very simple Wills are often produced whereby the husband leaves his wealth to his wife and vice versa. Statistics would show that it is often the husband who dies first.

Surviving spouse as first protection

In the situations mentioned above, a large number of farms inherited originally by the son have been passed to the wife without any tax problems due to the surviving spouse exemption. The first point is the lack of utilisation of Agricultural Property Relief (APR) and Business Property Relief (BPR) by using the surviving spouse exemption. The Deed of Variation (D of V) is one of the tax planning tools to be considered to protect APR and BPR. The problem then arises with regard to the farmer’s wife. Such a scenario might sound sexist but in the history of farming over the last century it has invariably been the case that farms are left to sons, that it is the husband who is the most involved in the farming and it is the husband who dies first.

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Currently UK farming is owned by an ageing population of farmers. Very few have passed the farm down to the next generation and the fact that when they die the farm is passed to their wife ‘free of tax’ through the surviving spouse exemption seems a very simple and straightforward move. However, a large number of advisers are now faced with the position that the wife has inherited or will inherit a farm that might then present inheritance tax problems for her.

With the continual attack by HMRC on active involvement for BPR, the review of the last two years can highlight considerable problems. A lot of work has been put into making sure that “Farmer Giles” does achieve inheritance tax relief on the farm and also associated investment assets such as the cottages. It might prove more difficult for “Farmer Georgina” to prove the active involvement which HMRC are so insistent upon in BPR claims.

Review of all farming Wills

The practical tip is that all farming Wills should be reviewed. Perhaps that will expose an even larger problem – potential intestacy where there is no Will. The consideration to pass business assets to the next generation using BPR or APR on the first death should be given key consideration. Protection can be sought through the D of V so that assets that do achieve APR or BPR can be passed down and those assets that do not can be passed to the surviving spouse to take advantage of all the reliefs.

Complacency over the surviving spouse exemption

This is not just a potential problem, it is an actual problem. There are farming wives who have inherited the farm who would have difficulty in arguing active involvement and this situation should be reviewed now. If there is still time for a D of V then act now if there are concerns over whether active involvement can be proved for BPR and active husbandry for the APR needed for the farmhouse.

Many advisers seem to be focusing on aspects of farm tax planning such as the main farming spouse while overlooking the surviving spouse. It is essential to consider the basics of up-to-date Wills, with a look at the role of the spouse and farming to include timely use of the D of V and protection through the Partnership Agreement etc. If mistakes are made or opportunities overlooked the quantum of the tax penalty could be very significant with current farm values.

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