The changes to Agricultural Property Relief (APR) for Inheritance Tax in the Budget last October were controversial and unpopular – not just with farming communities. It is worth noting that family businesses in other sectors suffered similarly with changes to how Business Property Relief is applied https://www.weightmans.com/insights/the-impact-of-the-labour-budget-on-small-businesses-business-property-relief/ but the reaction has been less vocal, perhaps because there seems to be something fundamental about an attack on our sources of food production in volatile times. Yet, despite the protests and criticism, there are no signs of the government backing down on the changes and so we can only look for ways to try and help our clients navigate the impact of the changes.
Please note this article focuses on APR in connection with land and not other farming assets.
How APR is applied now
The rules are contained in Sections 115 to 124C of the Inheritance Tax Act 1984. Relief is given where the value transferred by a transfer of value is attributable to the agricultural value of agricultural property.
1. Relief is given at 100% in the following situations:
- where the transferor’s interest carries the right to vacant possession or the right to vacant possession within 24 months
- where agricultural property is let on tenancies arising on or after 1 September 1995.
2. Relief is given at 50% in the following situations:
- where land let on a tenancy which began before 1 September 1995 and the transferor had become beneficially entitled to the land after 10 March 1981
- land let under an arrangement which does not allow vacant possession within 24 months.
The definition of agricultural property in the 1984 Act is agricultural land or pasture and includes woodland and any building used in connection with the intensive rearing of livestock or fish if the woodland or building is occupied with agricultural land or pasture and the occupation is ancillary to that of the agricultural land or pasture. It also includes such cottages, farm buildings and farmhouses together with the land occupied with them as are of a character appropriate. That means farmhouses which are integral to the farm in terms of location/size and activity. This is determined on a case-by-case basis for each farm.
But what is agriculture? A definition is contained in the 1986 Agricultural Holdings Act and includes horticulture, fruit growing, seed growing, dairy farming and livestock breeding and keeping, the use of land as grazing land, meadow land, osier land, market gardens and nursery grounds, and the use of land for woodlands where that use is ancillary to the farming of land for other agricultural purposes. Please note that this doesn’t include any commercial woodland or commercial letting of cottages/caravan parks or providing entertainment events or indeed any farm contracting services. Where there is a mix of activities then it is a case of determining what the major activity of the farm is, (and there are cases where relief is limited to part of the enterprise).
If you satisfy the conditions above, then to claim APR either of the following two tests must be met:
A. The two-year test, whereby throughout the two years ending with the date of the transfer (the transfer being the gift or death) the transferor must have occupied the property for the purposes of agriculture; or
B. The seven-year test, whereby throughout the period of seven years ending with the date of the transfer:
- the transferor must have owned the property; and
- the transferor or someone else must have occupied the property for the purposes of agriculture.
Note: to qualify for BPR there is an ownership requirement of two years immediately preceding the transfer, but it need not actually have been used for the purposes of that particular business, (for instance with AIM investment portfolios).
So, at present, if your farm meets the relevant criteria set out above then relief can apply. This effectively means that the value is not included in your estate for the calculation of Inheritance Tax on death, and gifts of this land made during your lifetime (either outright or into trust) do not attract any Inheritance Tax.
The importance of this relief cannot be overstated. Since its introduction it has made a massive contribution to the continuance of family farms down the generations. It is worth noting that if a beneficiary inherited the farm then they are deemed to have owned it from the date of death, unless it passes to a spouse where the spouse is deemed to have owned the same for any period the deceased owned it.
Changes introduced by the Budget
In simple terms, for an individual, the existing 100% rate would continue to be available only for the first £1million of property qualifying for APR or BPR. Qualifying assets over £1million will only receive 50% relief, (assets presently attracting 50% relief would continue to do so). The consultation process has made it clear that the £1million of relief will be per individual and it will not be transferable between spouses or civil partners. Note: if there are existing family trusts containing qualifying assets these will also each have a £1million cap on relief.
For more information see UK Farmers Face a £300,000 Inheritance Tax Shock | Weightmans
Transitional period
The new rules kick in from 6 April 2026. Between the 31 October 2024, (Budget Day), and 6 April 2026 we are in a transitional period which means that there is some possible scope for planning. Beware though that for any gifts of agricultural land made now, (whether outright or into trust), to be treated as subject to the existing regime (where 100% APR still applies), the person making the gift must live for seven years after it. If they don’t then the new rules will apply to the gift.
So, what are the options?
1. Make lifetime gifts now, but the donor must survive for seven years. There are some considerations with this.
- could term life assurance cover the risk of death within seven years? But how many farmers have surplus income for that purpose?
- don’t get caught by the Gift with Reservation of Benefit rules (GWR) or the seven-year clock will not start until the reservation of benefit is lifted. The GWR rules apply where either the person making the gift does not own/enjoy the property at or before the date of the gift, or at any time after the gift the property is not enjoyed to the entire exclusion or virtually the entire exclusion of the person who gifted it
- in partnerships, the profit-sharing ratio may have to be adjusted after the gift. For example, if a farmer takes his son into partnership and makes a gift to him of a share of all the partnership assets including the land. They then share the profits in the same proportion as they owned the assets at the commencement of the partnership. There is no GWR when the father dies because the son has taken possession and enjoyment of the partnership share given to him. However, if the farmer gifts the partnership assets but continues to keep all or most of the profit there is GWR. In other cases, a partnership may need to be created or a business incorporated
- where the gift includes the farmhouse and the farmer continues to live there exclusively, he will have to pay a full market rent to avoid GWR.
2. Alter wills to ensure that each spouse uses their £1m relief as it cannot be transferred between them.
Assume a married couple with a total estate of £6m which includes farming assets (land and farmhouse) of £5m. Previously, they could leave the entirety to each other and then to their children with no IHT being payable on the farm on second death as the full value of the farm would attract 100% APR. The remainder (£1m) would be subject to IHT after deduction of £650,000 (2 x nil rate band). Therefore, £1m - £650,000 = Inheritance Tax of £140,000.
After 6 April 2026 the effect of the same will is as follows:
Husband dies first; there is no £1m allowance as he leaves the whole estate to wife. When W dies:
- £1m of the farming assets receive 100% relief
- £4m of the farming assets receive 50% relief (£2m taxable)
- £1m remaining assets taxable
Total subject to IHT is £3m - £650,000 = Inheritance Tax of £940,000.
If both wills leave £1m of the farming assets to the children (on each death)
- £2m of the farming assets receive 100% relief
- £3m of the farming assets receives 50% relief (£1.5m taxable)
- £1m remaining assets taxable
Total subject to IHT is £2.5m - £650,000 = Inheritance tax of £740,000.
3. Retain existing trusts as each has a £1m allowance. It may be possible to add to these as the post-budget consultation document has been silent on the point.
4. Take out term life assurance to cover the Inheritance Tax. Again, this is likely to be costly.
Conclusions
The changes outlined in the Budget mean that many family farms will take an Inheritance Tax hit, but there is a window of opportunity where appropriate planning can help to mitigate the impact. For further information contact our Private Wealth team. Private wealth management lawyers | Weightmans
