The issue of development is a question that faces many farming families that own land, and I am certainly seeing a significant increase, in my local area, of land that is being developed. With a lack of available land in areas, this is creating ever increasing competition for the land that is on the market and the demand does not seem to be slowing.
Savills have indicated in their forecast, that land value is likely to grow at a rate of 4.4% over the next 5 years to 2026. Therefore, the issue of whether to consider development is a key question for many farmers. Add to that, the continued pressures that the farming industry is facing, this would suggest that the ability to generate substantial capital would seem highly attractive.
When considering development many of my clients are already aware that there are tax issues involved and are also aware, that this will affect the availability of Agricultural Property Relief in respect of Inheritance Tax.
In addition, as Planning Permission can take several years to obtain, there is a risk that the farmer may still be alive when the value has increased and of course, this would have a detrimental effect on their Inheritance Tax liability which would increase substantially.
It is possible for the family to benefit from the sale proceeds of the land but also to mitigate the Inheritance Tax position. Therefore, it is vital when considering development that the family consider the Inheritance Tax liability going forward.
A tool that can be of significant assistance in relation to limiting the tax exposure, is to place the land into a Trust while it is still being used for Agricultural purposes. It is important when considering such an option, that your legal advisor understands exactly what the land is being used for and therefore they can be confident, that the land would benefit from being placed into Trust as there would be reliefs available on the value of the gift into Trust for Inheritance Tax purposes.
The growth in the value of the land (from agricultural value to development value) is calculated outside the estate of the farmer and is captured by the Trust. There can be several beneficiaries to the Trust and therefore the value being received by the family can go to benefiting a number of generations. However, a Trust is not a tax-free vehicle and it must be understood that a Trust has its own tax regime which must be borne in mind when considering whether the use of a Trust to ensure that the wealth generated from the development can be maintained for future generations is the right option.
Here at Napthens, we are well experienced in creating Trusts and considering them alongside your Accountant and Financial Advisor. If you are considering development on the farm, one of the key questions that you should be considering as soon as possible is whether a Trust is an appropriate vehicle for you.
Napthens specialises in Estate Planning including creating Trusts for Rural and Farming clients. All our Estate and Planning Solicitors at Napthens have all achieved STEP status. Therefore, if you want to discuss any points further please get in touch