Our farming clients often ask our specialist Agriculture team about Agriculture Property Relief. This relief can cause confusion because it is not always clear which land or buildings will qualify.
With the agricultural sector facing potentially significant changes following Brexit, we expect growing numbers of our farming clients to diversify. Here in the South West, tourism is an obvious revenue stream for farmers to tap into so we anticipate more agricultural buildings being converted into holiday lets. Other farmers may seek to adapt some of their land for renewable energy projects, for example.
As farms seek to develop new revenue streams, it is crucial that they are not penalised by inheritance tax rules. If you are changing the use of land or a farm building, it is important to seek expert advice to establish whether what you are doing will affect the ability of the property to qualify for Agricultural Property Relief.
What is Agricultural Property Relief?
Agricultural Property Relief (APR) can be a very useful relief from Inheritance Tax for land and property used for agriculture. If the agricultural property is land or pasture that is used to grow crops or rear animals intensively, then it will qualify for APR.
However, it should not be assumed that all agricultural property will qualify for this relief, as there are various pitfalls which can affect its availability.
Here are four of the most common areas where problems can arise with APR:
1. How farmhouses are used
There have been numerous tax cases in recent years in which HMRC has sought to disallow APR on farmhouses.
HMRC will scrutinise the nature, size and character of the house, and the amount of land being farmed. They will also look at whether or not the farming business is being controlled and managed from the farmhouse. This final point can be a problem for older farmers as HMRC may suggest that the farmhouse is lived in by a retired farmer, so not being used to manage the farm and its operations.
Problems can also arise if the farmhouse is unoccupied at the time of a death. That is because HMRC can seek to argue that the farmhouse is not occupied for the purposes of agriculture, and, therefore, ineligible for an APR claim.
2. Other revenue streams on the land
In recent years, many of our farming clients have sought to diversify their operations in order to generate alternative income streams. However, this can impact the availability of APR on the underlying assets.
Renewable energy projects, caravan sites, holiday cottages and liveries can result in a loss of APR. That is why careful Inheritance Tax planning should be undertaken if you decide to explore other ways of generating income.
3. Development potential for the land
APR is only available for the agricultural value of land and property. However, the full market value of land can, in some circumstances, be considerably more than the agricultural value. This is especially the case where there is hope value, which means it has the potential for future development.
This is not necessarily a problem for land which is farmed by the owner as Business Property Relief may be available for the increased value. However, where land is let under a farm tenancy, Business Property Relief may not be available.
4. Derelict buildings
APR is only available for farm buildings occupied for the purpose of agriculture. Derelict buildings are unlikely to be deemed to be occupied for the purposes of agriculture, so APR may not be available for the value of these buildings.
It is important to never assume that Agricultural Property Relief will be available for all of your agricultural assets. We would always recommend that our farming clients undertake an Inheritance Tax review, to ensure that careful Inheritance Tax planning on their estate is carried out.
By Vanessa Parnell, Partner