Agricultural Property Relief (APR) is a Tax Planning mechanism available to farmers and landowners. It is designed to make the transfer of farming land on death less financially burdensome. It provides total or partial Inheritance Tax relief and is therefore a valuable instrument to reduce the Inheritance Tax liability on an Estate.
Generally, APR applies to land that is used to grow crops or to rear animals. Growing crops, stud farms for breeding and rearing horses, farm buildings, cottages and farmhouses and trees that are planted and harvested at least every 10 years qualify for APR. Livestock, harvested crops, commercial letting of cottages and barns as well as farming equipment and machinery do not qualify for APR. More often than not, where farmers own and farm the land themselves, the land will qualify for 100% relief.
Potential Pitfalls:
OWNERSHIP
You are required to own and occupy the land for agricultural purposes for the two years before death. Where you are married or in a Civil Partnership and you pass the agricultural land to your spouse, this ownership will continue as from the date of purchase.
VALUATION OF LAND
On death, the land is valued, however it is not necessarily valued at market value. It is valued as if it contained a restriction allowing it to be used only for agricultural purposes. It is usually assumed that around a 30% discount on the market value is given. Therefore Agricultural Property Relief may only cover a percentage of the value of the land, leaving part of it liable to Inheritance Tax. There is however, the possibility that the excess value could be relived by relying on Business Property Relief.
FARMHOUSE
A farmhouse on the land may qualify for APR if it is occupied for the purposes of agriculture. When you purchase the land, the farmhouse that you live in, as long as you continue to farm the land, should qualify for APR if it meets the test. If, however you do not actively farm the land but let the farmland out to other farmers, then the farmhouse you live in will not qualify for APR as it is not being used for the purposes of agriculture.
The test to see whether a farmhouse qualifies for APR is called the ‘Character Appropriate Test’ and raises questions as to whether the farmhouse is appropriate for the context and size of the land being farmed. This includes considering whether the farmhouse is too big for the land that this being farmed. Further, if the farming business is operated out of the farmhouse e.g., the central office is within the farmhouse, then this supports the claim for APR.
HMRC will take into account your ages and question whether the farmhouse is being used by yourself as a ‘home for retirement’. It is often sensible to look at having younger generations, who are involved in the business, to occupy the farmhouse.
HORSES AND LIVERY
For the purposes of APR, there must be a link with the horses and agricultural use. The breeding and rearing of horses on a stud farm, and the grazing of horses and any buildings used in connection with these activities is likely to qualify for APR.
Where the horses are grazed for a livery business, APR will not apply. However, in rare cases, Business Property Relief may be available depending on what additional services are provided in conjunction with this.
Key Points to Takeaway:
The above information provides a general overview of APR and some possible things to consider when tax planning for agricultural properly.
If you have agricultural land (or are considering purchasing agricultural land) it is recommended that you seek legal advice as to the Inheritance Tax position of the land as it may be possible to make changes to increase the availability of Agricultural Property Relief. Please contact us to speak to a member of our Private Wealth & Inheritance Team.
