NORTHERN IRELAND-A recent Court of Appeal decision has upheld a shock tax ruling that could devastate Northern Ireland’s historic tradition of passing family farms on to the next generation.
Until early 2008, HM revenue and Customs (HMRC) had accepted in practice that agricultural land let in conacre was part of the normal trading business of farming.
But last April, a Special Commissioners ruling overturned this, saying that letting land in conacre must be reclassified as an investment activity.
And on 25 February 2009 the Court of Appeal in Northern Ireland upheld that Special Commissioners’ ruling.
That means that thousands of acres of land let in conacre, which would previously be inherited tax-free on the death of the farmer, may now have to be sold to pay inheritance tax at to up to 40 per cent, ending a centuries-old tradition of passing family farms to the next generation.
It is estimated that around 30 per cent of Northern Ireland’s total farmland is let in conacre [around 300,000 hectares] and PwC Tax Director and estate planning specialist, Nigel Anketell, says:
"Farmland attracts two tax reliefs that reduce its value to nil when it passes to the next generation, ensuring family farms don’t have to be sold to pay Inheritance Tax.
"The first is Agricultural Property Relief at 100 per cent - this relief applies to the ordinary value of farmland - and was not referred to in the ruling.
"But where farmland has development potential but is still farmed by letting in conacre, it attracts a second relief - Business Property Relief - also at 100 per cent on that additional development value.
"The Court of Appeal’s ruling means that Business Property Relief won’t be available, so the potential development value - and not the agricultural value of the land - will, depending on the specific facts of each case, be subject to 40 per cent Inheritance Tax.
"The value of some farms for inheritance tax purposes could go from nil to millions, overnight, with every acre of land let in conacre liable for Inheritance Tax at rates of up to 40 per cent."
PwC warns that unless the House of Lords gives leave to appeal, farmers must be aware that where they have valuable farmland let in conacre, their children could well be faced with a substantial tax bill in the event of the farmer’s death.
This could mean a forced sale of the land to pay the tax and the break-up of hundreds of family farms.
Michelle Quinn, Tax Manager at PwC’s Omagh office, continues:
"Put simply, letting land in conacre will now be treated by the Inland Revenue, as an investment activity - unless the facts of a particular case can be argued to the contrary and this will significantly increase the exposure of such land to a charge to Inheritance Tax.
"It will now be increasingly important for famers to plan - at a much earlier stage - what they should be doing with their farm when considering who should inherit it.
"It is now no longer safe to assume - as many farmers have tended to do - that Inheritance Tax is a "voluntary tax". The Inheritance Tax permutations and options can be extremely complex and we urge farmers to seek advice specific to their own circumstances".
If you plan on transferring land or letting land in conacre, you can seek professional Tax advice from Michelle Quinn on 028 8224 6100, or email michelle.quinn@uk.pwc.com.
Additionally, PwC will host seminars entitled ’Managing your Wealth in Uncertain Times’ which will include a recap on the recent conacre ruling and the potential implications for farmers and investors. These seminars will take place at the Everglades Hotel in Derry on May 12th, and the Armagh City Hotel in Armagh on May 21st.
