Agricultural Property Relief – what is all the fuss about?
Of all the measures in the October Budget, the one that has had by the far the greatest coverage in the press has been the announcement of changes to the availability of Agricultural Property Relief (“APR”).
But why are so many members of the rural community so vexed about the changes when the response of the wider business community to changes to Business Property Relief (“BPR”) has been much more muted?
Why do we need Agricultural Property Relief and Business Property Relief?
Many of the features of APR and BPR are similar but Agricultural Property Relief has some key differences which explains why the two are split into separate reliefs.
We covered BPR in our recent article which can be found here: Business Property Relief Explained (2024) – IN-Accountancy.
Or you can watch an excerpt from our post budget webinar answering your questions on Agricultural Property Relief and BPR here: Changes to Agricultural and Business Property Relief explained
With this background in mind some of the key differences between the Agricultural Property Relief and Business Property Relief are below:
How the value of an asset is calculated for Agricultural Property relief:
- Agricultural Property Relief covers only the agricultural value of an asset in contrast to BPR which relieves the full value provided the asset is relevant business property.
- Agricultural value can be significantly lower than the market value of an asset.
- Take for example farmland – on average farmland in the UK might be valued for agricultural purposes at £10k per acre.
- Obtain planning permission to put some houses on that acre of land and the market value can increase very significantly to as much as (or in some cases more than) say £100k per acre.
- In this instance, APR however would still only give relief of the £10k, leaving the remaining £90k exposed to Inheritance Tax (IHT)
- Although there may be a claim for BPR to sit over the top of it where the land is actively farmed – because agriculture is still treated as a trade for IHT purposes so the land could still be relevant business property for BPR purposes.
Yes, it’s complex!
Why can farm land which is rented out qualify for Agricultural Property Relief?
- Agricultural Property Relief can be available on land which is rented out.
- There is a specific exclusion in the BPR rules for land which is merely rented out, meaning that it would not qualify for BPR as it would not be considered a business or trade in these circumstances
- If agricultural land is let to someone else who then uses the land for agricultural purposes then, once the land has been owned for seven years (as opposed to the usual two years for BPR and actively farmed agricultural land) the agricultural value can be covered by APR.
- There would though be no possibility of BPR covering any excess over that if, for example, planning permission had been obtained.
What other assets might qualify for Agricultural Property Relief, but don’t qualify for BPR?
- Agricultural Property Relief can cover farmhouses.
- With the very rare exception of some furnished holiday lets it would be very unusual for someone to be able to claim BPR on a residential property.
- (A house on site to house workers in a remote area could qualify perhaps)
- APR however can apply to the agricultural value of a farm house provided that it is used for agricultural purposes.
- And the same extends to farm workers’ cottages.
- The key is that the farmhouse has to be “character appropriate” to the farming activity.
- Picture a business owner who has sold out for £10 million.
- They buy a £2 million house with ten acres of paddocks attached onto which they put a few rare breed sheep.
- It would be hard to argue that the property here, even if it were a farmhouse, would be “character appropriate” to the level of farming activities undertaken!
- In contrast a farmhouse which has been occupied for many generations on a long-established working farm may well qualify for APR.
What else is different in terms of the rules for claiming Agricultural Property Relief versus claiming BPR
- For BPR, holding an shares in private trading company will allow relief to be claimed on the value of those shares.
- For Agricultural Property Relief, relief can be claimed for the agricultural value of the assets of a company but only if the shares held give a controlling interest – minority shares will not qualify.
- Of course, those minority shares may attract BPR but if the land owned by the company is let to another farmer then BPR would not apply either…
- This is one of the reasons why many farms are still held by partnerships rather than companies.
Now you understand some of the differences, let’s understand why farmers are so upset
The fundamental issue is that most of the typical farmer’s “wealth” will be tied up in their land – the very definition of “asset rich, cash poor.”
Farming is typically a low margin activity (until you get to the really huge industrialised farms where economies of scale allow margins to be improved).
Having to sell a proportion of the farmland to pay an IHT bill means that, for smaller farms especially, there is a risk that those farms will eventually cease to be viable.
Many farms have been in the same family for generations and there is as much an emotional as a financial attachment to the land.
The fact that there is only £1 million to cover all assets both APR and BPR, also present problems.
Although farmland and buildings attract Agricultural Property Relief, farm machinery only attracts BPR – and your average combine harvester does not come cheap.
The value of the farm and kit can pretty quickly go over the £1 million per partner.
Even payment of IHT by instalments still means the cash has to be found at 10% of the total every year…
So they have a point then?
The concerns of many farmers are perfectly legitimate and while some planning can mitigate the worst effects of the change, it is hard to see that this will not adversely affect the viability of any farm that is currently operating on fine margins.
Having said that, there are a number of points that do need to be weighed in the balance here:
- It is certainly true that the purchase of farmland has become a staple of the IHT planning industry over the years as a way of sheltering liabilities.
- A number of high profile instances have been mentioned and while some of these people may have a genuine passion for agriculture, it is hard to believe that is so in all cases!
- Quite apart from anything else these people must have contributed to driving up the price of agricultural land for those genuinely keen to make their living on the land
- The fact farmhouses can qualify for Agricultural Property Relief seems like a very significant advantage for farmers as against other business owners.
- Yes, farmers work very long hours and have to be on site in order to be able to do so, but may small business owners also work very long hours and travel some distance to and from work into the bargain.
- It is hard to see a claim that their home should qualify for BPR attracting much sympathy from HMRC.
- An increasing number of farmers in recent years have diversified away from agriculture and their land now houses everything from solar panels and wind turbines to glamping pods and yurts…
- It’s a perfectly rationale commercial decision to make is farming is not paying any more, but these are a long way from agriculture and often would not qualify for any IHT reliefs themselves.
- A cynic might therefore say that at least some farmers have managed to get over their emotional attachment to farming the land and have been prepared to give up IHT reliefs when the price was right.
That’s not to say farmers do not deserve sympathy for the impact the changes to Agricultural Property Relief will have, and in many, many cases their concerns are perfectly justified.
At the same time however, there are always two sides to the story!
Careful planning has the potential to mitigate the impact of IHT changes to a greater or lesser extent.
We still don’t have all of the details but time is moving on so while it would be best not to take any big decisions just yet, there is much to be said to starting to consider options so you are ready to act when the full details of the new rules are released…
If you think you might be impacted by these or other tax changes coming out of the October 2024 Budget, then please do contact the IN Team and ask for Paul or Kathryn who will be happy to help
For HMRC’s Guide to changes to Agricultural Property Relief, please follow the link below:
