Landed estates can offer buyers an effective way to mitigate taxes such as inheritance tax so long as people are prepared to take a long-term view.

High net worth individuals are looking at other ways to protect wealth for future generations as markets have fallen and the recession shows little sign so far of abating.

A key issue, as ever, is tax. People tend to have a particular dislike for inheritance tax because they see it as double taxation as they spend their working lives building up their wealth from taxed income only to see the fruits of their work taxed again on death. At present the nil rate band for inheritance tax is £325,000 and if the value of the death estate exceeds this, then it is taxed at 40 per cent.  This article explores what options the purchase of a landed estate offers for wealth preservation.

Tax reliefs

Agricultural Property Relief relief is given on the agricultural value of agricultural property, which can include residential property such as farmhouses and cottages, provided they are part of the farming operation. Agricultural value is the value the property has when used for agricultural purposes, and depending on location, agricultural land often has an element of value which is in excess of agricultural value.

If the owner is farming the land “in hand” as a business he will also be able to claim Business Property Relief on the excess of land value, over and above the agricultural value, as well as on the farm animals and machinery. This could mean the whole value of the property attracting 100 per cent relief against inheritance tax. This is a very attractive goal to aim for thereby passing the assets to the next generation without incurring any IHT.

For the purposes of this article, when we use the term landed estate we essentially mean agricultural property including land, woodland, farm buildings used in farming together with a principal house and ancillary cottages situated in the UK, Channel Islands and the Isle of Man. This was recently extended in the budget to include agricultural property in the European Economic Area.

How does the relief work?

100 per cent agricultural property relief is given if the owner of the freehold has vacant possession of the land, or if the land is tenanted and the lease was granted before 1 September 1995, it will be terminable within the next 24 months. For leases granted on or after 1 September 1995, 100 per cent relief is also available. APR relief of 50 per cent will be given if the lease was granted before 1 September 1995 and it has more than 24 months left to run. Even if on death the estate receives 50 per cent relief this is still a substantial saving of IHT in the context of a landed estate which could be worth millions of pounds.

To qualify for APR, the relevant legislation states that a certain period of ownership must be met.  If the owner occupies the property for the purposes of agriculture for two years, or if they owned the property throughout the last seven years during which time it was occupied by a tenant, who was farming the land, then APR would apply.

Wealth preservation

Landed Estates are long term investments. As opposed to some other investments, they are not as easy, quick or cheap to sell and therefore they are not simple to convert into cash. The ownership of a landed estate is also viewed in a different way, where owners often see themselves as custodians, and their role is to act as a steward for life to preserve the estate for the next generation. 

On top of the IHT advantages detailed above, landed estates also confer other benefits. Losses from farming can usually be used to offset against other income for income tax purposes, known as sideways loss relief. This can be valuable if you have different sources of income. As well as generating farming income and rental income from cottages, most estates have sporting such as shooting, fishing, and deer stalking which, if run as a business, will attract business property relief from IHT for the assets used in the business, as well as offering additional sources of income from paying guests.

A rural estate also offers a fantastic opportunity to enjoy country sports on your own land, where you can invite friends and family for a days sport in the countryside. Owning and running a landed estate is something which many people aspire to as they tend to offer a quiet rural location, and a much slower pace of life compared to city living, and the ability to be the master of all you survey.

Before everyone lucky enough to have the necessary funds decides to rush out and buy a landed estate, consider several factors. Firstly, the assets are tied into for the long term which is good from a wealth preservation perspective, but they are not easy to convert into cash so potential investors need to keep aside funds for ‘rainy day’ expenditure. Also, the rate of income return from landed property is very low, but this is outweighed by the ‘lifestyle benefits’ that a landed estate offers.

Another important factor to take into account is the seasonal nature of the cashflow from agriculture particularly with arable farming. Also, farm buildings on landed estates can be expensive to maintain, especially if they are listed, as they are often in need of regular specialist repairs.

The ownership of a landed estate does not offer the complete solution to wealth preservation but it does attract some good reliefs against IHT which are not available from other investments as well as confer some excellent other, often non-financial benefits.

Running a landed estate is demanding, with stable low rates of return, but the enjoyment factor of being able to command an excellent rural view from your house, partake in countryside pastimes including shooting, fishing, and stalking, coupled with the ability to tie in wealth for the long term could provide a happy solution to enable wealth to be passed onto future generations with a minimal inheritance tax cost.