Agricultural Property Relief

What Is Agricultural Property Relief?

Agricultural Property Relief is a form of relief from inheritance tax (IHT) that applies to the transfer of agricultural property. Depending on various qualifying conditions, it can reduce the value of such property by up to 100%. APR is designed to ensure the continuity of agricultural businesses across generations, recognising the unique challenges and contributions of the farming sector.

Main Elements of APR

• Qualifying Property: APR applies to property that is either occupied for the purposes of agriculture or is capable of being so occupied. This includes:
  • Agricultural land and pasture
  • Buildings used in connection with agriculture, such as barns or stables
  • Farmhouses, cottages, and farm buildings
• Rate of Relief: The relief rate is either 50% or 100%. Generally, 100% relief applies to property that the deceased either owned and farmed themselves or leased out under a qualifying tenancy. For other property types, such as certain farmhouses or cottages, 50% relief may apply.
• Ownership and Occupation: To qualify for APR, the property must have been owned and used for agricultural purposes for at least two years prior to the death of the owner if they occupied it themselves. If the property was let out, it must have been owned for at least seven years.
• Agricultural Value: APR only applies to the property’s agricultural value, not its market value. This is an important distinction, as the market value of agricultural land can be significantly higher if it includes potential for development or other uses.

Detailed Examination of Key Aspects

Qualifying Property

For property to qualify for APR, it must be defined as ‘agricultural property’. The definition encompasses various types of assets:

• Agricultural Land and Pasture: This includes fields, meadows, and other lands used for growing crops or grazing livestock. The primary criterion is that the land must be used for agricultural purposes.
• Buildings: Structures used for agricultural purposes qualify for APR. This includes barns, stables, and other outbuildings used in farming activities. Importantly, buildings must be actively used in the agricultural operation to qualify.
• Farmhouses, Cottages, and Farm Buildings: Residential properties associated with agricultural land can qualify, but specific conditions apply. Farmhouses must be of a character appropriate to the agricultural land, and there must be a functional link between the house and the land.

Rate of Relief

The rate at which APR is applied can be either 50% or 100%, contingent on the nature of the property and its use:

• 100% Relief: This rate applies to property that the deceased either farmed themselves or let out under a qualifying tenancy agreement. Additionally, it can apply to land under specific types of tenancy agreements established before 1 September 1995.
• 50% Relief: This applies to property that doesn’t meet the criteria for 100% relief. For instance, certain farmhouses and cottages, which may be let out but still meet the broader agricultural use conditions, fall into this category.

Ownership and Occupation Requirements

The eligibility for APR hinges significantly on ownership and occupation criteria:

• Two-Year Rule: If the property was occupied by the deceased for agricultural purposes, it must have been owned for at least two years before their death.
• Seven-Year Rule: If the property was let out, it must have been owned for at least seven years and used for agricultural purposes throughout this period.

These rules ensure that APR supports genuine agricultural businesses and prevents abuse of the relief through short-term ownership arrangements.

Agricultural Value vs. Market Value

A critical aspect of APR is its application to the ‘agricultural value’ of the property. Agricultural value is often lower than market value, which can include non-agricultural potential, such as development prospects. For APR purposes:

• Agricultural Value: This is the value of the property when used solely for agricultural purposes. It excludes any premium that might arise from potential non-agricultural uses.
• Market Value: This is the full open market value of the property, which might be significantly higher due to factors like location, development potential, or other non-agricultural uses.

Challenges and Considerations

While APR provides significant tax relief, it is not without its complexities and potential pitfalls:

Character Appropriate Test

For farmhouses to qualify for APR, they must pass the ‘character appropriate test’, which assesses whether the farmhouse is proportionate and relevant to the size and nature of the agricultural land. Factors considered include:

• The size of the house relative to the land
• The farmhouse’s historical and functional link to the agricultural operation
• The use and occupation of the farmhouse by those involved in farming activities

Commercial Use and Diversification

Modern agricultural businesses often diversify into non-agricultural activities to remain viable, such as tourism, retail, or renewable energy. While diversification can ensure financial sustainability, it complicates APR eligibility. Property used for non-agricultural purposes may not qualify, or only a portion may be eligible, necessitating careful planning and clear delineation of agricultural versus non-agricultural uses.

Changes in Ownership and Tenancies

Ownership structures and tenancy arrangements can impact APR eligibility. For instance, changes in tenancy agreements, especially post-1995, can alter the relief available. Reviewing and potentially restructuring these arrangements to maximise APR benefits is essential.

Legal and Valuation Disputes

Disputes often arise regarding the valuation of agricultural property, particularly distinguishing between agricultural and market values. Engaging qualified valuers and legal advisors is crucial in these cases to ensure accurate assessments and robust defences against potential HMRC challenges.

Strategic Planning for APR

Effective utilisation of APR requires strategic planning and professional advice. Key strategies include:

Regular Review of Property and Use

Regular reviews of property holdings and their use ensure compliance with APR requirements. This includes documenting the agricultural use of buildings and land, reviewing occupancy and tenancy agreements, and maintaining records to support farmhouses’ ‘character appropriate’ status.

Structuring Ownership and Tenancies

Careful structuring of ownership and tenancy arrangements can optimise APR benefits. This might involve:

• Ensuring long-term ownership and agricultural use to meet the two-year and seven-year rules
• Reviewing and potentially revising tenancy agreements to maintain qualifying status
• Considering succession planning and the timing of transfers to maximise relief

Diversification and Segregation

When diversifying into non-agricultural activities, it’s crucial to segregate these operations clearly. Maintaining distinct records and separate areas for agricultural and non-agricultural uses can preserve APR eligibility for the agricultural portions of the property.

Professional Valuations and Legal Advice

Engaging professional valuers experienced in agricultural property ensures accurate valuation assessments. Legal advice is essential to navigate the complexities of APR, handle disputes, and provide strategic guidance on ownership and tenancy structures.

Case Study: Successful Utilisation of APR

Consider a family-owned farm that has been in operation for generations. The farm includes 200 acres of agricultural land, a farmhouse, several barns, and additional cottages. Over the years, the family diversified into glamping and renewable energy, installing wind turbines on part of the land.

To maximise APR benefits, the family undertook the following steps:

• Regular Reviews: They conducted annual reviews of property use, ensuring that the majority remained dedicated to agricultural purposes.
• Tenancy Agreements: They revised tenancy agreements for let-out cottages to ensure they met APR requirements.
• Segregation of Uses: They segregated areas used for glamping and renewable energy, maintaining distinct records for agricultural and non-agricultural activities.
• Professional Valuation: They engaged a professional valuer to assess the agricultural value of their property accurately, distinguishing it from market value influenced by diversification activities.

Upon the patriarch’s death, the family was able to claim APR, significantly reducing the estate’s IHT liability. The farm remained operational, and the next generation continued the agricultural tradition without the burden of a substantial tax bill.

Conclusion

Agricultural Property Relief (APR) is a vital tool for preserving the legacy and continuity of agricultural businesses in the UK. It provides substantial tax benefits and recognises the unique challenges faced by the farming community. However, navigating the complexities of APR requires meticulous planning, clear documentation, and professional advice.

At DLS Solicitors, we are committed to helping our clients maximise the benefits of APR. Through strategic planning, regular reviews, and expert guidance, we help ensure that agricultural properties are passed down through generations, sustaining the agricultural heritage and contributing to the rural economy.

By understanding the intricacies of APR, agricultural property owners can make informed decisions, safeguarding their businesses and legacy for future generations.