Tax loophole closure of the week: “Lifestyle farmers” face a tax clampdown

Buying a farm to escape inheritance tax (IHT) has long been a popular ruse, says the FT. Unfortunately, a recent court win forHM Revenue and Customs renders this option a little less enticing.

Land Tribunal judges decided in a test case that farmers' inheritance-tax relief will "only cover the agricultural value of a farmhouse and not its market value, which is usually far higher, meaning 40% tax is levied on the difference".

Mark Balfour, partner at accountants Larking Gowen, says the Revenue has been pushing for a clampdown and this case "could give it the backing it has been looking for".

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Currently, IHT relief on agricultural land and property is available to anyone who buys a farm, provided certain conditions are met. The Land Tribunal decision made it clear that although land and farm buildings will still be eligible for IHT relief, the farmhouse itself should only qualify if the owner or their spouse farms the land on a "day-to-day basis", or used to before retiring.

Lifestyle farmers, those who leave the day-to-day running to a contract farmer, and those who have scaled down their agricultural activity, will all be affected.