Beware tax pitfalls when housing self-employed workers, says Old Mill

Farmers who provide housing for self employed workers run the risk of losing valuable Inheritance Tax relief on the value of their farm cottages.

Usually farm cottages occupied by farm employees qualify for 100% IHT relief, says Mike Butler, Head of Rural Services at accountant Old Mill. But from a tax perspective there is a huge difference between farm workers engaged through the PAYE system and those who are registered as self-employed.

"Some farmers may find it attractive to save on National Insurance and other expenses by using self-employed labourers. But if they provide accommodation for their workers, they must be aware of the impact such an arrangement could have on the taxation of farm cottages, potentially costing the business £100,000s."

For example, a farm cottage worth £275,000, which is occupied by a farm employee, would qualify for 100% IHT relief. But if it housed a self-employed worker it would become liable to IHT charges of 40%, raising a tax bill of £110,000.

"When considering whether a property is subject to Inheritance Tax, one must at least look at its use and qualifying occupation periods for two years prior to the date of death," says Mr Butler. "It is essential that farmers are aware of this potential pitfall, and plan now to avoid hefty tax liabilities in the future."