Inheritance tax has long been a favourite political pawn but, whatever the Budget brings, farmers still need to plan carefully for this valuable tax concession.

It can be argued that all land and most buildings have a degree of potential development or hope value. There will always be some opportunity to grow more houses, improve buildings and convert barns. The problem to consider is how will this value be protected to ensure inheritance tax relief is achieved on either the potential or the development proceeds.

Risks of the do nothing strategy

If the potential development asset is held within a business, like farmland within a large working farm, there is temptation to do nothing for now and worry about it later.

But when potential development land is owned by the elderly farmer or the landowner with health problems, what action can be taken?

Where potential development land has not obtained planning permission there is often no guarantee that the development land or a substantial part of it will be sold during the lifetime of the landowner. It is not just the elderly who are inheritance-tax-vulnerable - it can be anyone who is about to realise the development in the near future.

If the estimated time for obtaining planning permission is, say, three to four years in relation to a substantial proportion of the development land, then there is a realistic risk that the landowner would still be alive when the development is realised and the value of his estates for IHT purposes would increase very substantially.

This is because the hope value would have been realised. There is always a substantial leap in value, which reflects the change from a probability of planning permission to a certainty.

Any cash or binding contract for sale would not qualify for Business Property Relief (BPR). This is because either the surplus cash would be regarded as an excepted asset.

There could be a nightmare situation where the farming business holds the cash and is therefore deemed to be an investment business. This is because either the cash or the investment in development land is greater than the trading activity.

Reinvesting the development proceeds

Of course, there still would be the prospect of reinvesting the cash proceeds in other farmland or other businesses, which qualified for BPR.

There is case law to support the proposition that the cash would not have had to be reinvested at the time of the landowner's death to avoid being an excepted asset so long as there was a credible plan for reinvesting it in a manner which qualified for BPR. But, to make this convincing, there would have to be clear documentation of this intention.