Business Relief and Agricultural Property Relief – A Brief Introduction to Succession Planning for Farming and Land-Based Businesses

Why Do Business Relief and Agricultural Property Relief Exist?

Inheritance Tax (“IHT”) is ordinarily charged on a person’s estate on all relevant property held at the point of death. The rate of taxation is 40% (36% where 10% or more of the deceased estate is donated to registered charities). There also exists a Nil-Rate Band of £325,000 and a residence Nil-Rate Band of £175,000 which may apply to reduce the taxable amount.

Business Relief and Agricultural Property Relief were established in order to help prevent farming and land-based businesses from having to break up or liquidate assets to pay IHT charges on a change of ownership.

Business Relief and Agricultural Property Relief were implemented because the tax charges that would arise without the reliefs were viewed as having a “damaging effect on risk taking and enterprise within a particularly important sector of the economy.”

Agricultural Property Relief (“APR”)

APR reduces the amount of IHT payable when certain agricultural property is passed on during lifetime or as part of a will.

What Qualifies – Agricultural Property

According to s. 115(2), IHTA 1984, agricultural property is agricultural land or pasture. This definition can include woodlands and any building used in connection with the intensive rearing of livestock or fish, as long as their occupation is ancillary to the agricultural land or pasture.

In order for APR to apply, the agricultural property should be part of a working farm in the UK (restricted to the UK since 6 April 2024), and the property can be either owner occupied or let.

However, the period of ownership is important – to qualify for APR, the property must have been owned and occupied for agricultural purposes immediately before its transfer for:

• 2 years if occupied by the owner, a company controlled by them, or their spouse or civil partner, and
• 7 years if occupied by someone else.

Rates of APR

The rates of APR, should you qualify, are either 50% or 100%.

Simply put, APR is due at 100% if:

• The owner farmed the land in question personally.
• The land was used for agricultural purposes by someone other than the owner on a short-term grazing licence.
• The land was let on a tenancy which began on or after 1 September 1995.

Property owned before 10 March 1981 may also qualify for 100% relief under certain circumstances.

Any other case of land qualifying for APR is at 50%.

Some shares and securities may be eligible for APR if they gave the deceased control of the company at the time of death.

Note that any outstanding mortgages or liabilities on the property must be deducted before calculating APR.

Agricultural Value

Agricultural value is defined in s. 115(3), IHTA 1984.

When valuing property for APR purposes, it is important to bear in mind we are not valuing the market value of the asset, but the value as if the property could only be used for agricultural purposes.

This is why you need to identify each part of the agricultural property, so you can consider its agricultural value against which APR will apply, should the conditions be satisfied.

Farmhouses and Cottages

When valuing farmhouses and cottages for APR, it should be noted that they should be of a nature and size appropriate to the farming activity.

A cottage or farmhouse must be occupied by someone employed in farming or:

• A retired farm employee, or
• The spouse or civil partner of a deceased farm employee.

They must occupy the property as either a:

• Tenant under a lease granted as part of their former employment contract, or
• Protected tenant with statutory rights.

Woodlands

Woodland is only agricultural property if it is occupied with, and that occupation is ancillary to, agricultural land or pasture. It will include woodland shelter belts, game coverts, fox coverts, coppices grown for fencing materials on the farm and clumps of amenity trees or spinneys.

Woodlands occupied for purposes that are not agricultural, such as amenity woodland or woodland used for the production of commercial timber will not be agricultural property. However, they may be eligible for woodlands relief (s. 125, IHTA 1984) or BR.

Thus, if there is a commercial timber operation, then the IHT claim should be for BR as opposed to APR.

Gifts of Agricultural Property

It is possible for gifts of agricultural property to qualify for APR if the property qualified for APR at the time of gift.

Essentially, if the property remains agricultural property from the date of gift and is held by the recipient until their own or the gifter’s death, then APR will still apply.

Replacement Agricultural Property

If the initial agricultural property was received as a gift, and you exchange all the sale proceeds of the initial agricultural property for other property which would also qualifies for APR if held for 2 years, the replacement property stands in the shoes of the initial property so to speak.

Note that the sale of the initial and the purchase of the replacement property must occur within 3 years of each other.

Moreover, the sale and purchase must take place at arm’s length. If this does not occur, APR relief is limited by the proportion that was given as a gift.

Overlap with Business Relief

BR cannot be claimed on the portion of assets which have had APR claimed already. However, you may claim BR on any value of an assets not wholly covered by APR where you are a farming business.

For example, if the agricultural value of a property is £200,000 and 50% APR is claimed (£100,000), the remainder of the asset which was unclaimed by APR (£100,000) could potentially be claimed under BR.

Business Relief (“BR”)

Formally known as Business Property Relief, BR reduces the value of a business and/or its assets (transferred in life or as part of a will) when calculating IHT payable.

What Qualifies

In order to qualify for BR, property must be “relevant business property”, as defined by s. 105, IHTA 1984.

The period of ownership is again important, as BR is only available where the deceased owned the business or asset for a minimum of 2 years.

Assets should be used wholly or mainly for the business purposes of the company of the transferor.

BR can apply to transfers:

• Of value and chargeable during the transferor’s lifetime.
• PETs chargeable on the transferor’s death within 7 years.
• On death.
• In respect of periodic IHT charges on settled property.

However, it is not possible to claim BR on an asset if it:

• Also qualifies for Agricultural Relief
• Wasn’t used mainly for business in the 2 years before it was either passed on as a gift or as part of the will
• Isn’t needed for future use in the business

Rates of BR

The rules here are clearer than APR.

100% BR is available for:

• A business or interest in a business.
• Shares in an unlisted company.

50% BR is available for:

• Shares controlling more than 50% of voting rights in a listed company.
• Land, buildings, or machinery owned by the deceased used in a business they were a partner in or controlled.
• Land, buildings, or machinery used in the business and held in a trust that it has the right to benefit from.

Woodlands

Note that woodlands can indeed qualify for BR, provided that they are commercial woodlands run with a view to profit, as per s. 11, ITTOPA 2005.

The key here is that the business has to be on a commercial basis. Therefore, documentary evidence to support the claim is vital.

Gifts of Business Property

It is possible for gifted, eligible business property to qualify for BR if the recipient keeps them as a going concern until to death of the donor.

Moreover, similar to APR, it is possible to replace the property or assets – like machinery – with something of equal value if it’s for use in the business.

A View from A Farmland Investor

Here are some comments from the investment side from an agricultural and finance expert from Traditum, which is a private equity firm that provides, planning, coordination, and choice across their clients’ private wealth:

“Traditum, through its Agri+ Fund, is looking to help bring investment in UK agriculture into the 21st century by opening up the asset class to individuals who previously either did not want to expend the time or take the risk to manage an investment farm but also investors who want to allocate funds to the sector but find the prospect of buying an entire farm imprudent from a risk and asset allocation perspective. Our structure allows investors to effectively take part ownership in farms with the funds other investors and still have the investment fall outside of the estate for inheritance tax purposes. Traditum will look to manage the farms and run them on a basis that makes them sustainable from both an environment but also financial perspective. In managing the farm assets, we will look at each area of the farm and look how to maximise value without losing the character of the farm and the countryside it sits in. 

While the APR is a worthwhile relief, we tend to look to rely more on BR.  This is because many of the strategies we look to incorporate into our farm management are not agriculture in the traditional sense of the industry. We want our owned and managed farms to be considered and valued as businesses rather than asset plays and create upside for our clients following their transformation and, in our opinion, the simpler relief is the BR for a trading business. We believe the themes which will drive investment in UK farmland into the medium term are concept such as

• Renewables
• Value added development
• SFI/BNG

Farms need to create alternative revenue streams to supplement the traditional farming revenues which barely permit many farmers to scrape a living and at the moment it is not clear enough that such alternative revenue streams are considered farming activities.”

Please note that this quote does not constitute advice, but it an interesting and educated viewpoint to consider.

Next Steps

If claiming APR or BR sounds like something you are interested in understanding further, it is important that you obtain full, comprehensive advice. We would be happy to schedule an initial call with one of our experienced tax consultants to discuss your options.

If you are interested but concerned you may not qualify for an APR or BR, don’t worry – if you do not qualify for APR or BR, other options are available in order to mitigate IHT and we can discuss this further.

Disclaimer: This article is for general information only and is not intended to constitute individual advice. It is recommended that you seek independent tax advice before taking steps to structure your farming/land-based business to claim APR/BR.