At Blackstone Solicitors, we understand that farmers and landowners often explore various ownership structures to manage their agricultural property efficiently, reduce risks, and optimise tax planning. One increasingly common approach is the use of corporate ownership structures, such as farming companies or family partnerships. However, while these arrangements can offer many advantages, they can also have a significant impact on eligibility for Agricultural Property Relief (APR).
This article will explain how corporate ownership structures interact with APR, outline the potential challenges, and provide practical advice to help you navigate this complex area of law. By understanding these nuances, you can make informed decisions to protect your estate and maximise inheritance tax relief.
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What Is Agricultural Property Relief (APR)?
APR is an inheritance tax relief designed to reduce or eliminate the tax burden on agricultural property. It applies to the agricultural value of qualifying assets, such as:
- Agricultural land and pasture
- Farmhouses, cottages, and other buildings integral to farming operations
- Woodland and ancillary structures used for agriculture
To claim APR, the property must be used for agricultural purposes and meet specific conditions regarding ownership and occupation. Depending on the circumstances, APR can provide relief at either 100% or 50%, significantly reducing inheritance tax liabilities.
Corporate Ownership Structures: An Overview
Corporate ownership structures encompass various arrangements, including:
- Limited Companies: Where the farm is owned and operated by a registered company, and shareholders hold equity in the business.
- Partnerships: Where ownership is shared among partners, who may include family members or third parties.
- Trusts: Where assets are held by trustees for the benefit of specified beneficiaries.
While these structures can streamline operations and offer asset protection, they also introduce complexities in tax planning and APR eligibility.
Impact of Corporate Ownership on APR Eligibility
The use of a corporate structure can affect APR eligibility in several ways:
- Ownership and Control
APR applies to agricultural property that is owned outright or via certain qualifying arrangements. When agricultural assets are held by a company, shareholders do not own the property directly; instead, they own shares in the company. This distinction can create complications:
- Shares vs Property: APR does not automatically extend to the value of shares in a company, even if the company’s sole asset is agricultural property.
- Controlling Interest: Relief may be available if the shareholder has a controlling interest in the company, allowing them to claim APR on the agricultural value of the underlying assets. However, this is subject to stringent conditions.
- Trading vs Investment Activities
For APR to apply, the property must be used for agricultural purposes. Corporate entities engaged in non-agricultural activities or holding assets for investment purposes may jeopardise eligibility:
- Mixed-Use Companies: If a company engages in both farming and non-agricultural activities, such as property development or renewable energy projects, the agricultural assets must be clearly distinguished.
- Holding Companies: Companies that primarily hold assets rather than engage in active farming are less likely to qualify for APR.
- Length of Ownership and Occupation
APR requires the property to have been owned and occupied for agricultural purposes for at least two years (if occupied by the owner) or seven years (if let to a tenant). Corporate structures can complicate these requirements:
- Recent Transfers: Transferring property into a company shortly before a death may reset the ownership timeline, potentially disqualifying the assets from APR.
- Corporate Occupation: The company must demonstrate that it is using the property for agricultural purposes. Passive ownership or lack of clear evidence can undermine eligibility.
- Farmhouses and Buildings
Farmhouses and buildings are often a contentious area in APR claims, and corporate ownership adds another layer of complexity. For example:
- Farmhouse Character: The farmhouse must be of a character appropriate to the farm’s agricultural activities. Corporate ownership can complicate the connection between the farmhouse and the land.
- Employee Use: If the farmhouse is occupied by a company employee rather than a direct owner, APR eligibility may be affected.
Business Property Relief (BPR) as an Alternative
In cases where APR is unavailable due to corporate ownership, Business Property Relief (BPR) may provide an alternative route for reducing inheritance tax. BPR applies to shares in trading companies, including farming businesses, but it is subject to different conditions:
- Trading Threshold: The company must meet the “wholly or mainly” trading test, meaning at least 50% of its activities must be trading rather than investment.
- Ownership Period: Shares must have been owned for at least two years to qualify for BPR.
While BPR can complement APR in certain scenarios, it does not cover all agricultural assets, such as land owned outside the company structure.
Practical Steps to Protect APR Eligibility
If you are considering or currently using a corporate ownership structure for your agricultural property, take the following steps to safeguard APR eligibility:
- Review Ownership Arrangements
Ensure that the ownership structure aligns with APR requirements. For example:
- Maintain direct ownership of agricultural land where possible.
- If using a company, retain a controlling interest to maximise potential relief.
- Clearly Define Activities
Keep detailed records of the company’s activities, distinguishing between agricultural and non-agricultural operations. This will help demonstrate compliance with APR criteria.
- Monitor Transfers and Timelines
Plan property transfers carefully to avoid resetting ownership and occupation periods. Engage a solicitor to structure transfers in a way that preserves APR eligibility.
- Document Farmhouse Use
If a farmhouse is part of the property, ensure its use is clearly tied to agricultural activities. Keep evidence of occupation, such as tenancy agreements or utility records.
- Explore BPR Options
Evaluate whether BPR can complement or substitute for APR in your estate planning. For example, shares in a trading company may qualify for BPR even if APR is unavailable.
Conclusion
Corporate ownership structures can offer significant advantages for managing agricultural property, but they also present challenges for APR eligibility. By understanding the interplay between these structures and inheritance tax reliefs, you can make informed decisions to protect your estate and reduce tax liabilities.
We have a proven track-record of advising upon all aspects of private client work. We will guide you through the process and ensure all checks are carried out swiftly and efficiently and we firmly believe that with the right solicitors by your side, the entire process will seem more manageable and far less daunting.to incorporate, what kind of ownership
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It is important for you to be well informed about the issues and possible implications of drafting a Will and setting up a Trust. However, expert legal support is crucial in terms of ensuring a positive outcome to your case.
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Disclaimer: This article provides general information only and does not constitute legal advice on any individual circumstances.
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