It is not often that the words “simple” and “straightforward” are used in relation to Inheritance Tax (IHT). However, the first of a two-part review undertaken by the Office of Tax Simplification (OTS) found that this is how those in rural business viewed reliefs available to them.
Given that there is 100% tax relief on offer to eligible businesses and assets, it is vital that anyone operating in the agricultural sector is fully aware of their rights and benefits under agricultural property relief.
Agricultural property relief (APR) is a relief from IHT. Where certain conditions are met, it reduces the value of any gifts of agricultural property made by the owner (known as the transferor) during their lifetime or upon death, so IHT on those gifts (or transfers) are reduced.
The amount of relief available is usually 100%. This applies to all land owned and farmed by the farmer himself, and where the land is tenanted but the lease was signed on or after 1 September 1995. The 50% rate will apply if the following conditions are met:
It is important to note the relief is provided based on the agricultural value of the land. The market value may differ if, for example, the land has mineral value or planning permission for the development of residential housing. If the agricultural value is less than the open market value, business property relief may offset tax relief on the difference.
It may seem self-explanatory, but for APR to apply, the land being gifted or transferred must be agricultural property. Agricultural property is defined in section 115 of the Inheritance Tax Act 1984:
Regarding the definition of ‘ancillary’, the HMRC Commissioner was asked to rule if three broiler houses used for the intensive rearing of chickens were of a "character appropriate" to the qualifying agricultural land in the estate (comprising of seven acres) and thereby falling into the definition of section 115.
The Commissioner ruled the broiler houses were not "ancillary" to that of the agricultural land; therefore, the claim for APR failed. The reason given was that although the broiler houses were farm buildings, they could only qualify if they operated as an “add-on” or subsidiary to a larger agricultural operation carried out on other land. There was no evidence of wider agricultural activities on the rest of the seven acres not used to occupy the broiler houses (Richard Williams (personal representative of Mary Philomena Williams (deceased)) v HMRC  (SpC500)).
The concept of ‘farm business tenancy’ was introduced by the Agricultural Tenancies Act 1995. This replaced the Agricultural Holdings Act 1986 and ensures that the tenancy agreement governs the relationship between the landlord and tenant in relation to rural leases. It also increased APR to 100%. The challenge is to convince tenants to surrender their existing lease, re-negotiate and re-sign a new one under the Agricultural Tenancies Act 1995. Under the 1986 Act, tenants enjoyed extensive security of tenure rights and could claim compensation if they quit the tenancy. These are not advantages a sensible tenant will readily relinquish.
The way around this issue is to instruct an experienced Solicitor to draft and negotiate a new lease under the Agricultural Tenancies Act 1995 which results in the tenant retaining their existing rights under the Agricultural Holdings Act 1986 and the landlord benefiting from 100% APR. In addition, an agricultural Solicitor has the knowledge required to ensure the tenant is not disadvantaged through the new lease resulting in Capital Gains Tax and/or Stamp Duty Land Tax being owed.
To qualify for APR, the flowing conditions must be met:
These conditions are in addition to the property being classed as agricultural. Agricultural land is land used for growing crops and/or intensively rear animals. It also includes:
If you require detailed legal advice about APR or any other agricultural or farming matter, please call our agricultural solicitors on 0161 941 4000. We are proud to be members of the National Farmers Union and the UK200 Agricultural Group as well as a Legal 500 firm.