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  • Katherine Bullock

Practical Magic – Estate Planning – Agricultural Property Relief 101

Agricultural Property Relief (APR), a close cousin of BPR, is a frequent subject of these posts and I find myself regularly tagging on the few words “and APR”. But while perhaps narrower in its application, it is nevertheless an extraordinarily generous tax relief which is more than worth the trouble to obtain. Clearly critical to the smooth transition for landed estates and farmland from one generation to another, it also attracts investors seeking IHT efficient investment in a major asset class, as well as those whose assets occupy that grey area between a house and a farmhouse and between development land and farmland. Before considering any of these issues in more detail, the basic foundations of the relief need to be addressed.

"...APR is an undeniably important relief; claimants are often asset-rich, cash-poor..."

Firstly, what is APR? In the simplest terms, it is a relief that reduces the value of a transfer of agricultural property chargeable to Inheritance Tax (IHT). In most cases this means that 50% or even 100% of the value of that property can be removed from the charge to tax. In order to claim APR, a number of conditions must be met. Firstly, the property must be agricultural land; in other words there must be some connection to agriculture, so grazing horses used for riding and not breeding or agriculture is not enough. Agricultural property includes woodlands connected to a farm, farmhouses, cottages and their gardens, and ‘ancillary’ farm buildings used in connection with the rearing of livestock or fish, or which have a ‘character appropriate’ to the agricultural land. Unlike BPR, the relief is restricted to UK land and land in the Channel Islands, Isle of Man or an EEA state at the time of transfer. For all other land, BPR needs to be considered. Although beyond the scope of this post, it is also worth noting that where a farming company owns agricultural land, the shares may attract APR, where certain conditions are met.

There are two common pitfalls here. A woodland or farm building, including the farmhouse, must be ‘ancillary’ to the wider agricultural land. That is, they must be an addition to the land, and not the main feature of it. Somewhat counter-intuitively, for example, the broiler houses of a chicken farm were found not to qualify for APR as they were the main feature of the farm and not ‘ancillary’ to it. The other trap is in the ‘character appropriate’ requirement for cottages, farmhouses and other buildings, which is a complicated assessment made on a case-by-case basis but which broadly requires a farmhouse to be appropriate to the land it is meant to be the centre of – no tiny cottages on giant estates, or mansions ‘farming’ a single vegetable patch – and for the farming operations to be actively run from the farmhouse, and not simply lived in by the owner of the land.

The next rule to consider is that for APR to apply, the land must have been occupied by the transferor for the purposes of agriculture throughout the two years before the transfer occurred, or the land must be owned by the transferor for the seven years before the transfer and occupied, whether by the transferor or someone else, for the purposes of agriculture throughout that time.

This raises two questions: when is a property occupied, and when is it occupied specifically for agricultural purposes? To speak briefly to the first question, occupation is not defined in the legislation, and is a question of fact to be determined on a case-by-case basis, along the same lines as the occupation of a residential property. The question of ‘agricultural purposes’ can be equally thorny, but essentially comes back to the question of what is considered agriculture touched upon above. In addition specific rules apply for these purposes to replacement property and to occupation by certain tenants, such as retired farmworkers and their widows or widowers.

The next question is at what rate APR applies. Broadly APR is given at 100%, where the interest in the property has the right to vacant possession or vacant possession can be obtained within twelve months of the transfer (for example short term grazing lets). This 12 month period is extended by concession to 24 months. The terms of farming partnership agreements and in particular any notice period attaching to a right to withdraw or terminate the partnership therefore requires careful review.

Where there is a tenancy, 100% relief applies where the property is let on a tenancy that began on or after 1 September 1995. Transitional provisions may apply to grant 100% relief to pre-1 September 1995 tenancies very broadly where the transferor owned the property on 10 March 1981 and fulfils a number of conditions which can be found in s.116(2)(b) IHTA 1984. By concession 100% relief is also available where there is a tenancy and the interest of the transferor is valued at an amount broadly equivalent to the vacant possession value of the property. In any other case, qualifying property will only obtain 50% relief.

APR only applies to the ‘agricultural value’ of the property. This is the value that the property would hold were it subject to a covenant that it could be used only and exclusively for agricultural purposes (as considered above), absent any value gained through development potential, favourable features for non-agricultural residence such as proximity to an urban centre, and other such value-enhancing features. All other value attracts IHT as normal unless another relief such as BPR applies. APR and BPR may both therefore apply to different elements of the value.

There are other provisions, such as those that recapture the relief in certain circumstances, that must also be considered and these are not covered in this brief overview.

APR is an undeniably important relief; claimants are often asset-rich, cash-poor, and farmland especially vulnerable if broken up to be sold piecemeal. However, APR is also prone to complexity, can be capricious and hard to predict especially in situations which stray from the idea of a farm as traditionally envisioned. Do not be afraid to actively pursue APR; it is undoubtedly an extremely valuable relief where available; take advice well in advance and review the position at least every three to five years and before any business change; and above all be prepared to support your position with extensive evidence when the time comes.


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