Agricultural values are being driven by a number of factors including the need to produce food, farmland being viewed as a safe asset in volatile times, and by the potential tax incentives, in particular the inheritance tax (IHT) relief offered and the scope for capital gains tax roll-over relief. Whilst many of the deals we have concluded recently have had all of these factors present, it is the influence of the IHT relief which is most notable.
Briefly, agricultural property relief (APR) is available for transfers of value of agricultural property (whether during a lifetime or on death). ‘Agricultural property’ includes agricultural land and pasture, woodland occupied with agricultural land, and agricultural buildings, farm cottages and farmhouses which form part of the overall farming enterprise.
APR is available at a rate of 100% if the ownership test for APR is satisfied:
- the land has been owned and occupied by you for agriculture for a period of two years either in person or through a contract farming arrangement or partnership; or
- the land has been owned by you for a period of seven years and during that period has been occupied either by you or another person for the purposes of agriculture. This includes land let to a third party, usually on a Farm Business Tenancy.
Where the ownership test is not satisfied, APR may be available on agricultural land at a rate of 50%. The lower rate usually applies where land is still let on a tenancy which was granted before 1 September 1995.
APR is only available on the ‘agricultural value’ of the land. Any hope value or development value will not qualify for APR. However, if the agricultural land is being used in the owner’s business (and this depends on the facts) business property relief (BPR) may be available to relieve any non-agricultural value. BPR may be available at either 50% or 100%, depending on the circumstances of the owner and the business.
Farmhouses and farm cottages have their own special tests for APR. Securing the benefit of APR on the farmhouse is generally especially worthwhile, given its likely value, but also especially tricky, because it must be of a ‘character appropriate’ to the farmland. Only the ‘agricultural value’ of the farmhouse benefits from the relief.
The obstacles and hurdles in obtaining APR appear to be growing and HMRC grows ever more demanding in its requirements for proof of use of each part of a farm. Detailed advice should always be taken to ensure that the right steps are being taken, and that actions are recorded properly, to give the best possible chance of benefiting from the tax reliefs.