Inheritance Tax Reliefs for Farmers

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Simon Cieluch - Senior Associate

Inheritance Tax Reliefs for Farmers

Data from 2022 shows that the value of farmland in England was at an all-time high, with the average price of arable farmland at £10,600 per acre.

With the average farm size in England being about 215 acres, family farms can be worth well in excess of £2 million without even considering the value of the farmhouse.

In the UK, Inheritance Tax (IHT) is generally charged at 40% unless certain exemptions or reliefs apply.

Everyone has an allowance of £325,000 (the Nil-Rate Band (NRB)) that is taxed at 0%, but this covers assets passing both on death and in the seven years before, so it can be exhausted before someone dies, leaving the whole of their estate potentially liable to tax.

In addition to the NRB, where someone leaves their main residence to their direct descendants, their estate may be eligible for an additional exemption of £175,000 called the Residence Nil-Rate Band (RNRB).

The downside of the RNRB is that it is reduced by £1 for every £2 someone's estate is worth over £2 million, and when calculating if an estate is worth over £2 million, any reliefs (discussed below) are not taken into account.

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Agricultural Property Relief (APR)

For farmers, the most valuable relief against IHT is APR. In brief, for APR to apply, the following tests must be met:

  1. The property must be agricultural in nature (including, amongst other things, land or pasture, cottages, farmhouses, and other buildings that are of a character appropriate to the agricultural land or pasture)
  2. The property must have either:
    1. Been occupied by the transferor for the purposes of agriculture throughout the two years before the date of the lifetime gift/death; or,
    2. Been owned by the transferor throughout the seven years before the lifetime gift/death and occupied (by anyone) throughout the same period for the purposes of agriculture.

The rate of APR is typically 100% if it is available, but in some instances, it may be reduced to 50%.

This means that when calculating IHT, the agricultural value of the agricultural assets is reduced by either 100% or 50%.

Agricultural value is defined in law as "the value which would be the value of the property if the property were subject to a perpetual covenant prohibiting its use otherwise than as agricultural property."

If the transfer is a lifetime gift, and the donor dies within seven years or keeps the benefit of the property, then additional requirements apply before APR can be claimed.

If, when it is given away, the agricultural property is subject to a binding contract for sale, APR will generally not be allowed.

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Agricultural Property Relief APR

Business Property Relief (BPR)

As referenced above, APR only reduces the agricultural value of the agricultural assets.

It can be common for farmland to be eyed up by developers and therefore have "hope" value or development value or for people wanting to move from the city and "escape to the country" being willing to pay over the odds for a rural lifestyle.

In these cases, the true value of the property would exceed its agricultural value.

APR would not apply to this excess value, but BPR may be available instead, and the rate available would either be 100% on a business or interest in a business (for example, a partnership share) and 50% on land, buildings, plant or machinery owned by the transferor and used wholly or mainly for the purposes of a business carried on by him, or a partnership in which he was a partner (as long as the underlying business/partnership interest also qualifies for BPR).

To qualify for BPR, the business interest/property must have been owned by the transferor throughout the two years before the transfer, although there are exceptions, e.g. if the property is transferred between spouses on death, where the survivor is credited with the ownership period of the first to die.

The underlying business must also have been carried on for a gain and must not have consisted wholly or mainly in dealing in securities, stocks or shares, dealing in land or buildings or making or holding investments.

This should not be an issue for farms that are actively farmed.

As with APR, BPR will generally not be allowed where the property is subject to a binding contract for sale.

BPR will also be clawed back if the property is transferred by way of a lifetime gift and the transferor dies within seven years of the gift unless certain conditions are met.

Where property qualifies for APR and BPR, APR will always be applied first to the agricultural value, and BPR would then be applied to any additional value over and above the agricultural value.

APR and BPR are applied before the NRB and RNRB, meaning that farming estates commonly pass free of Inheritance Tax.

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Business Property Relief BPR

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Everyone's estate is different, and Myerson's Wills, Trusts and Probate team can advise you on Inheritance Tax in the agricultural industry and help you plan for the future by preparing a Will for you or advising on lifetime gifting.

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Simon Cieluch's profile picture

Simon Cieluch

Senior Associate

Simon has 10 years of experience acting as a Wills, Trusts, and Probate solicitor. Simon has expertise in administering both taxable and non-taxable estates, as well as complex estates such as those containing business and agricultural property, and cross-border issues.

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