I am often asked by clients whether Agricultural Property Relief (APR) is still relevant, and how useful it is as an Inheritance Tax (IHT) relief when Business Property Relief (BPR) at the full rate of 100% is potentially so valuable an estate planning tool. Here are some of the questions that I frequently encounter. Please note that my comments do not cover residential properties on farms, for example the farmhouse.
Is APR still useful?
The first point to bear in mind is that APR (broadly) applies to agricultural land or buildings farmed in-hand by the owner, or let to a tenant who farms. Provided land or buildings are in use for agricultural purposes, APR should be available at either 50% or 100%, subject to ownership and occupation conditions have been met.
BPR, on the other hand, is not generally available on land or buildings let to a tenant farmer (though it can be claimed on land and buildings farmed in-hand, if certain conditions are met), because the letting of the land on its own would not constitute a trading business activity carried on by the owner.
Where let land and buildings are owned as part of a composite business comprising in-hand farming activities and agricultural lettings, BPR can be available on the let property, but only if the in-hand (trading) farming activity predominates. If BPR is not available because the letting activity predominates, APR would still be available on the let farmland, even if BPR is not. Given the high value of agricultural property in some areas, APR can therefore still be extremely valuable if BPR does not apply.
Is BPR more valuable than APR?
Very simply, APR applies to the agricultural value of land and buildings, whilst BPR (if it is available) can apply to their full market value. The IHT rules require APR to be claimed in priority to BPR, which can have interesting consequences. For instance, if an area of farmland has development potential, the agricultural value is likely to be less than its market value. As APR will only apply to the agricultural value, the value in excess of this – which could be considerable – would be exposed to a 40% IHT charge.
BPR, on the other hand, does not distinguish between agricultural and market value. If BPR applies at 100%, then it can generally be used to mop up any value in excess of the agricultural value once APR has been utilised. This can potentially remove the full market value of a piece of land, or agricultural buildings, from an IHT charge.
It is also important to note that APR only applies to land and buildings (and farmhouses) – it does not apply to plant, machinery and so on. In relation to those sorts of assets, BPR has to be claimed instead.
Do I think APR is here to stay?
With BPR being an overarching relief, it is conceivable (ignoring any EU constraints) that a review of IHT reliefs by a government might seek to water down or abolish APR. For party political reasons BPR is probably less vulnerable to attack, because it applies to all businesses. Having said this, abolishing APR for let agricultural property would discourage the letting of farms, and have far-reaching socio-economic consequences for the rural community and property market, and could potentially lead to the breakup of larger farms and rural estates that rely on farming rents.
Given the security of tenure that often applies to let farmland, it seems reasonable that a landowner is not penalised on death for giving up vacant possession (which would usually continue beyond the owner's death) and allowing someone else to farm. Continuing to allow APR (whether at 50% or 100%) on let holdings therefore still has considerable public policy relevance as an incentive for owners to part with possession of their land. From the tenant's perspective, the value of an agricultural tenancy qualifies for 100% APR , whilst conferring considerably more security than a contract farming agreement.
What about APR on in-hand farmland?
It might be queried whether APR is still relevant for land that is farmed by the owner. In such cases, it is true that 100% BPR could provide full relief from IHT if APR were to be abolished, provided the correct business structure and ownership is in place, However, unlike BPR, there is no requirement under the legislation for a farming business to be run with a view to making a profit in order for 100% APR to be available on land (and possibly buildings) used in the business, or that are assets of the business. Beware though, that very different rules apply to farmhouses in this context, both in relation to the availability of APR and BPR and the scope of this article does not cover this topic. Land and buildings farmed in-hand but at a low level of commerciality or profit, are therefore unlikely to qualify for 100% BPR; however, they could potentially qualify for APR at 100%.
Another point in favour of 100% APR is that the test for whether or not 100% BPR applies is a cliff edge: it is either available on the full market value of a business and all its underlying assets, or it does not apply at all. If a farming business fails the test for BPR (for instance, because the letting/non-trading activity predominates), it will not qualify for any BPR at all. By contrast, provided that the agricultural property is farmed, it will in principle still be eligible for APR whether it is in-hand or let to a tenant subject of course to the ownership and occupation rules. APR is therefore far from having had its day.
What about farmhouses and farm cottages, business structures and the availability of BPR?
These need chapters of their own!