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.
What is 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:
- The land is leased to a farmer using it for agricultural purposes;
- The lease began before 1 September 1995; and
- At the date of death or transfer, the lease has at least 24 months to run.
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.
What is classed as agricultural property?
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:
- Agricultural land or pasture.
- Woodlands occupied with (but ancillary to) the agricultural land or pasture.
- Structures used in relation to intensive rearing of livestock or fish, provided the buildings are occupied with (but ancillary to) the agricultural land or pasture.
- Cottages/farmhouses and the land occupied with them (such as a garden) that are of a character appropriate to the agricultural land or pasture.
- Farmhouses and the land occupied with them, that are of a character appropriate to the agricultural land or pasture.
- Any other non-derelict farm buildings related to farming, such as sheds and other farm buildings.
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 [2005] (SpC500)).
Agricultural property relief and farming business tenancy
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.
Do you qualify for agricultural property relief?
To qualify for APR, the flowing conditions must be met:
- The property being transferred must be owned or used for agricultural purposes immediately before its transfer for two years if occupied by the owner, a company controlled by them, or their spouse or civil partner, or seven years if occupied by someone else (i.e. tenanted).
- The property must be part of a working farm located in the UK, Channel Islands, Isle of Man, or European Economic Area.
- If the property was originally required through a transfer, to qualify for APR the property must have:
- Been eligible for APR at the date of the first transfer
- Been occupied for agricultural purposes by the original owner or their personal representatives
- Qualified for APR apart from the occupation and ownership tests
- At some point have been transferred upon death
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:
- Stud farms
- Land used for harvesting and planting trees on a ten-year rotation
- Land not currently being farmed under a crop rotation scheme or Habitat Scheme
- Milk quota valuation associated with the land
- Certain shares and securities associated with rural land
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.