Caution urged on West Midland entrepreneurs heading for the green pastures

Agricultural land values continue to be pushed higher by entrepreneurs, looking to save their families from the burden of inheritance tax (IHT).

But Mrs Nicola Preston, a barrister from Birmingham's No5 Chambers specialising in probate and inheritance tax, urges caution on West Midlands' professionals tempted by tax-saving purchases of the rolling acres of the region's shire counties.

"It is possible to take advantage of agricultural property relief, which effectively means that the value of farms can be excluded from the value of assets for IHT calculations, with potentially huge savings," Mrs Preston explains.

"But you have to be careful as the relief only applies to the agricultural value and not to any premium price paid for example for development potential.

"Furthermore, the farmhouse will only benefit if it is both the place from where the farm is managed and proportionate to the farming operations. Even then, only the agricultural value will create the relief."

Agricultural property relief is only available where the owner has had it and farmed the land themselves for at least two years or where a landlord has owned it for seven years but it has been occupied by a tenant for agricultural purposes. There are specifically eligible activities including stud farms and woodland.

"This seems relatively clear but any relief would not extend for example to outbuildings converted to craft centres, though in some circumstances, businesses like this and corporate shoots for example, could attract business property relief."

Mrs Preston, who advises on estate and inheritance tax issues, explains that farmhouses are subject to specific challenges by HM Revenue and Customs (HMRC).

"Sometimes, modernised and improved farm houses can be grand properties with little resemblance to the old image. A very large farmhouse with a small land holding and a non-viable farm for example would not qualify.

"More controversially, HMRC has successfully argued recently that houses on farms where the farming has been contracted out are not necessarily agricultural property for the purposes of the tax relief.

"This is a real problem because farming activities, such as harvesting, have often been contracted out and there will be a question of where the line is drawn.

"Those who contract out farming activities will have to prove that they have a significant role in running the farm."

Nevertheless, the price of agricultural land is being pushed higher, with an increase of around 25 per cent reported in the two years to the start of 2006. Recent research has suggested that farmers account for less than half of those buying farms, and the demand from those looking to minimise IHT is a significant factor.

The present climate of a government looking to clamp down on what they term ´loopholes´ available for exploitation is likely to lead to changes.

HMRC is already testing the boundaries in an ongoing bid to limit the reliefs for urbanites investing in farms mainly to save 40 per cent inheritance tax, so increased caution will be needed, says Mrs Preston.

"Advice should be taken before planning a farm purchase but that it is equally important that this advice should be updated afterwards," she said.

"Agricultural property relief will probably remain in place, to encourage the farming sector, but there is little doubt that HMRC will seek to tighten the rules even further."