When you write your will it is important to be sure who owns the land and buildings used by your farm business. Ownership will affect the inheritance of your assets and the tax charged on your death.
It is common for the farm land and buildings to be owned by an individual partner and made available to the partnership. When that partner dies the value of the land and buildings form part of their estate for inheritance tax (IHT) purposes and IHT may be charged.
Agricultural relief from IHT may apply but not to the whole value. For example, there may be development or hope value which does not qualify for the agricultural property relief.
To the extent that agricultural property relief is not available then business property relief may be claimed. However, that business property relief will be restricted to 50% if the land is owned by you and not by the business.
It would be good IHT planning to move the land and buildings into the partnership to obtain 100% business property relief. However, in doing that the land and buildings are dropped into the pot for what is known as legal rights.
Legal rights are the right of a spouse or children to take a share of the value of your estate on death. Land and buildings are protected from this, but not if they are in a business. If you have chosen an heir to the business then other family members can claim legal rights and cut across your will. The business may need to take on borrowings, or the business may even need to be sold, to fund a legal rights claim.
There is legislation which allows partners to get out of this, in practice via statements in the partnership accounts and in the partnership agreement that the land and buildings will not be in the pot for legal rights. However, there is debate around whether this law is good. One can imagine a child who is disappointed to learn that the will does not leave them the farm going to court to bring the farm into legal rights.
If legal rights are a concern then there are other ways of dealing with them, which would allow you to then move the land and buildings into the business to secure the full IHT reliefs.
Balanced advice is required, weighing up the tax and succession aspects, in conjunction with a review of the titles deeds, partnership agreement and partnership accounts. Our specialist personal, land and rural business teams can provide this.
If you have any questions, please get in touch with Leigh Gould or your usual Brodies contact.