Farmers interested in taking the lump sum to exit the industry are being warned to watch out for the ‘inheritance tax traps’ with any decision they make.
Defra recently announced details of its lump sum exit payment scheme, which opens to farmers in England in April.
Payments of up to £100,000 will be treated as capital not income, resulting in lower tax bills.
But NFU Mutual has warned interested farmers to look out for any ‘inheritance tax traps’.
In order to claim the exit payment, farmers must either sell their land, rent it out, give it away, surrender a tenancy, or plant trees on it.
All of those options could have an impact on future inheritance tax bills, according to the rural insurer.
Sean McCann, financial planner at NFU Mutual said: “It’s good news the lump sum is being treated as capital rather than income as that will reduce tax bills on the payment.
“However, Defra’s scheme is attempting to encourage older farmers to exit the industry, so inheritance tax is likely to be a key consideration for many of those interested in taking the lump sum.”
Farmers considering selling their land should think about the inheritance tax traps, Mr McCann explained.
Agricultural Property Relief could help reduce or even eliminate inheritance tax on agricultural land and buildings.
However, he said: “If the land is sold and the proceeds are not reinvested into other qualifying assets, they would be subject to inheritance tax if the owner were to die.
“One way to reduce an inheritance tax bill is to reinvest some of the money into a pension, which is normally free from inheritance tax and can be used to pass wealth down to the next generation as well as fund a retirement.”
Many farmers may choose to keep hold of the land and rent it out on a farm business tenancy in order to receive Defra’s exit lump sum.
But Mr McCann said this could trigger an increased liability to inheritance tax: "The most common trap is likely to be farmers who rent out their land but remain in the farmhouse.
"This will mean in many cases they will lose Agricultural Property Relief on the value of their farmhouse as it will no longer be occupied by the farmer of the land."
It could also cause issues where the land has an increased development or ‘Hope’ value, he explained.
Although the land could still qualify for Agricultural Property Relief on the agricultural value, if it has any potential development value this would not qualify for relief.
This would mean families could end up with an unexpected inheritance tax bill, Mr McCann warned.
Tenant farmers can normally reduce or eliminate inheritance tax on their machinery and livestock by claiming Business Property Relief.
Mr McCann said: “Surrendering a tenancy and selling machinery and stock would create a pile of cash that would be subject to inheritance tax, if it wasn’t reinvested into other qualifying assets business assets or pensions.”
He added that farmers who choose to plant trees on their land were also likely to lose Agricultural Property Relief on the value of the land.
"They may qualify for Business Property Relief if it is run as a commercial business," he said.
