Farmers have often balked at passing on the farm to the next generation because of the perceived risk of one of the children overspending or divorcing, resulting in split assets.
However, since retirement relief for capital gains tax (CGT) has been phased out, as well as the advantages of holding assets at death (whereby the property is revalued at death for CGT purposes), the need to pass on assets during lifetime has become less important. Another disincentive to handing over the reins has also come in the form of the inheritance tax (IHT) agricultural and business property relief rules.
Over the last few years, HM Revenue & Customs' review of the availability of agricultural and business property relief has increased the risk of farmhouses and other land bearing a tax charge on death. This has been complicated by the possibility of having to pay for care home fees in the event of becoming too frail to stay in your own home. Local authorities will only pay for long-term care if your assets fall below £21,000: to help them assess your capital, they follow national guidelines – CRAG (Charging for Residential Accommodation Guide).
Although your farmhouse, if lived in by you and your spouse, cannot be taken into account when paying care fees, this does not apply to the other assets of the farm and business once long term care becomes permanent. CRAG suggests that local authorities have discretion as to whether the business assets are taken into account, but with increasing numbers of people needing nursing care, and the corresponding call on local authority funds required to pay care fees, your local authority is less likely to exercise its discretion favourably. With care fees averaging £25-£30k, a prolonged stay in nursing care may result in you having to draw on the capital of the business and possibly jeopardising the ongoing viability of the farm.
Even in the worst case scenario for CGT and IHT, the highest rate of tax is 40% whereas a prolonged stay in nursing care can amount, in effect, to a 100% tax on assets.
To avoid drawing on the partnership assets, the partnership deed can be amended to include a provision that the partnership assets or an individual’s capital account cannot be withdrawn to pay for care fees. Whilst there is no guarantee this will prevent the local authority assessing that capital, it will certainly deter the local authority from placing a person into a position where they are acting in breach of contract.
Bearing in mind the joint strictures of a more strict interpretation of agricultural property relief for IHT purposes and the increased risk of assessment for care fees, the decision whether to retire and pass on the farming partnership and assets suddenly becomes rather more pressing!
