Agricultural Property Relief is a relief from Inheritance Tax. The relief is complex, but in essence it is designed to prevent Inheritance Tax from being such a burden on farming families that they are forced to sell the main asset from which a family draws income to pay the tax.
The relief is given on the agricultural value of agricultural property situated within the UK, Channel Islands, Isle of Man or a state within the European Economic Area which has been occupied for the requisite period of time for ‘agricultural purposes’. Where the conditions are met it reduces the value of any gifts of agricultural property made by a person (the ‘transferor’) during lifetime or on death for the purposes of any Inheritance Tax due on those gifts.
What Is The Rate Of Relief?
There are two rates: 100% and 50%. 100% relief is available where:
- the transferor has the right to vacant possession of the property immediately before transfer or the right to obtain it within the next 12 months;
- by virtue of an Extra Statutory Concession where the transferor’s interest carries the right to vacant possession within 24 months;
- the property is valued at an amount broadly equivalent to vacant possession value, notwithstanding the terms of a tenancy;
- the transferor had been entitled to his interest in the property since before 10 March 1981 and the conditions for ‘working farmer relief’ are met; or
- the property does not fall within any of the above but is let on a tenancy that began on or after 1 September 1995 (e.g. a Farm Business Tenancy).
Where the conditions for 100% are not met, 50% relief is applied.
When Is Agricultural Relief Available?
Relief is available for transfers:
- In life;
- On death; and
- When agricultural property is chargeable as settled property.
Relief is not available if the agricultural property is subject to a binding contract for sale at the time of the transfer.
What Assets Qualify For Agricultural Property Relief?
Agricultural property means agricultural land or pasture; woodland occupied with agricultural land or pasture; buildings used in connection with rearing of livestock or fish; farm cottages; farm buildings and farmhouses. In the case of farm cottages, farm buildings and farmhouses they must be of a “character appropriate” to the agricultural land.
Agricultural Property Relief is not available on assets such as paddocks used for riding ponies; farms not occupied for farming purposes; general woodland and farm cottages which are not occupied by farm workers.
Ownership & Occupation Test
To qualify for Agricultural Property Relief the property must be:
- occupied by the transferor for the purposes of agriculture for two years ending with the date of the transfer; or
- owned by the transferor throughout the period of seven years ending with the date of the transfer and must have been occupied (for the purposes of agriculture) throughout that period either by the transferor or by another person.
There are additional rules relating to successive transfers.
Ownership By A Company
Ownership by a company (in which the transferor has shares or securities) for the requisite seven-year period satisfies the ownership condition, provided that the transferor has also owned those shares or securities for the seven-year period.
Therefore, if the shareholder has owned his shares for seven years and the company has owned the land during that period (the land being occupied by a third party for agricultural purposes), the shareholder will be entitled to Agricultural Property Relief on the value of the shares in so far as the value is attributable to agricultural property.
Ownership By A Partnership
Members of a partnership are treated as owning any property which is owned by the partnership. As a result, if a partner has held their partnership interest for a period of seven years and the partnership has owned the land during that period (the land being occupied for agricultural purposes during that period by a third party), the partner is entitled to Agricultural Property Relief on his partnership share in so far as the value is attributable to agricultural property.
The Definition Of ‘Agricultural Purposes’?
The phrases ‘agricultural purposes’ and ‘for the purposes of agriculture’ are interchangeable in the legislation. Whether property is occupied for the purposes of agriculture will depend upon the fact of the case.
To qualify for Agricultural Property Relief, property must be both agricultural property and occupied for agricultural purposes. It is most important that both requirements are satisfied.
Land which is used for the following purposes is normally accepted as being for the purposes of agriculture:
- cultivation to produce food for human consumption;
- supporting livestock kept to produce food for human consumption, e.g. milk, meat, wool etc;
- animals kept for farm work e.g. horses;
- land set aside for permanent or rotational fallow.
What Is Agricultural Value?
This is 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’. A specialist valuation is therefore imperative to ensure the correct value is attributed to the land and buildings.
It is possible that there may be a higher market value, such as in the case of ‘hope’ or development value or where the property may attract wealthy commuters seeking a rural lifestyle.
What Other Option Is Available If Agricultural Property Relief Does Not Apply?
If Agricultural Property Relief does not apply to a proportionate value then Business Property Relief may apply to relieve the remainder – see Guide to Business Property Relief.
Specific Asset Examples
Farmhouses - HMRC, when deciding if a house is a farmhouse, rely on the ‘elephant test’ i.e. while it might not be able to define a farmhouse it is generally easy to identify one. There has been a wealth of case law covering this one issue and there is a five stage test which includes aspects such as whether the house is relevant to the size of the land and whether the farm office is located there.
Farm Cottages - To qualify for Agricultural Property Relief farm cottages must be appropriate to the property and the land occupied with the cottages must be of a character appropriate to the property. Additionally it must be occupied by someone of the required status (e.g. farm workers).
Farm Buildings - Farm buildings must of a character appropriate to the land – which they usually are unless the land is very small. The building must be used for the purposes of agriculture. Agricultural Property Relief will not be available for derelict buildings.
Horses - A paddock will not qualify for Agricultural Property Relief in itself. The breeding and rearing of horses on a stud farm does qualify for Agricultural Property Relief subject to meeting the qualifying conditions.
Planning Point - Agricultural Property Relief will be diluted if any mortgage or charge reduces the value of the agricultural property.
This is a complex area of the law, and we recommend that anyone who believes Agricultural Property Relief to be available to seek appropriate advice to ensure any relief is maximised and not lost or reduced by failing to meet some of the qualifying criteria.