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[02.10.2014]

Farmer Giles has an Agricultural Property Relief Nightmare

To an observer watching Farmer Giles as he lay in bed asleep, all was content. He dreamt of high farm yields and good output prices and a healthy bank balance, and continued low tax rates.

Suddenly, he began to move uncomfortably as clearly something unsettling was happening in his dream. He soon awoke in a cold sweat and sat up in fear. What had caused this upset?

He had never thought much about Inheritance Tax and Agricultural Property Relief. He knew generally that he should have no IHT problems on death, and also knew that IHT rates of relief for agricultural property were 100% and had been for many years. In his dream they had dropped to 50%.

He had bought his 160 acre farm in 1960 for £1,600, cheap because it was run down and needed lots of work. The bank had requested a valuation recently which showed it to be worth £2 million. He correctly understood the following:-

 

.                                                                                          £

Farm value                                                                  2,000,000

Agricultural Property Relief (APR) @ 100%                   (2,000,000)
 .                                                                       _____________

Chargeable estate                                                                   Nil
.                                                                        _____________

 

Taxable estate                                                                        Nil
.                                                                       _____________

He was quite happy with this scenario but in his dream with APR at 50% the following situation unfolded

.                                                                                          £

Farm value                                                                  2,000,000

Agricultural Property Relief (APR) @ 50%                    (1,000,000)
 .                                                                       _____________

.                                                                                 1,000,000
Less IHT exemption                                                      (325,000)
.                                                                        _____________

 

Taxable estate                                                               675,000
.                                                                        _____________

IHT @ 40%                                                                 (270,000)
.                                                                        _____________

Giles was married with two adult sons. His wife had no involvement in the farm herself and lived off a generous legacy left to her by her favourite aunt. His two sons were employees. That’s how Giles liked it as it – it was his farm after all. By breakfast time Giles had opened his mail and calmed down. Later that morning he would phone his accountant and set up a meeting and see what could be done to change things for the better.

Moral – always have an idea how possible tax changes could affect you. Income Tax may affect you when you are alive but death duties, ie Inheritance Tax will affect those you leave behind. Can you discuss these matters with your accountant?

Addison & Co

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