With inheritance tax sometimes being payable at a rate of 40% on the value of what you own when you die, Agricultural Property Relief (APR) is an important relief for farms and estates when it comes to succession planning.
However, as the Labour Government looks to fill in the much talked about £22 billion fiscal black hole ahead of their first budget on 30 October, it is anticipated that the new administration will look to reassess APR; with a view to potentially removing, capping or redefining this relief entirely.
What is APR?
APR is available on legacies of land occupied for the purposes of agriculture, together with appropriate buildings and farmhouses. The rate of relief is generally 100% but may be 50% for certain types of tenanted land. To qualify for APR, the relevant property in question must have been either:
- Occupied by the deceased owner for the purposes of agricultural for two years prior to the gift being made; or,
- Owned by the deceased for seven years but occupied by someone else for the purposes of agriculture throughout that period.
The term "agriculture" is not actually defined in the inheritance tax legislation. In general terms though, horticulture, fruit growing, and the rearing of livestock can be said to fall within the ambit of agriculture. Any woodland that is ancillary to agricultural land (e.g. woodland that acts as a shelter belt for outside cattle or sheep wintering) is also classified as being property occupied for the purposes of agriculture.
Exclusions and the farmhouse dilemma
Buildings cannot qualify for APR on their own. They must be ancillary to or occupied with agricultural land. Therefore, certain buildings are excluded from APR. For instance, derelict buildings that are not occupied for the purposes of agriculture and broiler houses for rearing poultry have been excluded from APR.
Another issue to consider when it comes to APR is the role of the farmhouse. To qualify for APR, the farmhouse must have been occupied by the farmer and must also have been the centre of operations. In other words, the farmhouse must have been the building from which the farm was actively managed by the deceased.
With this in mind, farmers should be aware that once they have retired, APR may be lost in relation to the farmhouse. In such circumstances, it may be prudent to contemplate whether the next generation should occupy the farmhouse if they are to continue the farming operation.
The farmhouse must also meet the "character appropriate" test as specified by HMRC. The farmhouse must be ancillary to the land and the land must predominate. Regard will be had to other similar sized farms within the locality. For example, a stately home situated on a small holding of land will not generally qualify for APR.
Finally, it is worth being aware that diversification away from agriculture (e.g. commercial quarrying, holiday letting or running a farm shop) will result in the loss of APR. Despite this you may still be eligible to obtain Business Property Relief (BPR) over these non-farming elements. However, specialist legal advice should be sought for when it comes to farming diversification in the context of succession planning.
Looking ahead
Many commentators anticipate that APR will be altered in some way in the upcoming October budget. However, we do not actually know for certain if that will happen. Whether that change comes in the form of amending the conditions to obtain the relief; capping the amount of relief available; or even abolishing the relief entirely, is yet to be seen.
If you have any concerns regarding agricultural property relief or would like to discuss your own succession planning in greater detail, please get in touch.
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