Farms and farming properties are highly valuable assets, so it is no surprise that farming families are often concerned at the amount of inheritance tax their estate may attract when they die. Fortunately, agricultural property relief is an inheritance tax relief which can reduce the potential tax bill on agricultural and other farming property by up to 100%.
In this article, the wills, trusts and estate planning team at Warners Solicitors in Kent, explain how agricultural property relief (APR) can minimise the inheritance tax bill on your estate.
What is agricultural property relief?
APR is an inheritance tax relief which farmers can rely on to reduce their tax bill on their estate. The tax relief available is either 50% or 100%, depending on the nature and use of the assets under consideration.
This tax relief is particularly beneficial to farmers because not only does it apply to the land itself which is being farmed, it also applies to qualifying buildings such as farmhouses, farm buildings and cottages. The relief applies to a generous range of agricultural assets and can even be used on lifetime gifts of agricultural property.
What land does it apply to?
The definition of agricultural property includes:
- farmhouses;
- other farm buildings such as barns and cottages that form part of the land;
- gardens if they are necessary for the reasonable enjoyment of the property;
- pastures and agricultural land used to grow crops or rear animals intensively;
- woodland where used, for instance, for the intensive rearing of livestock; and
- some agricultural shares and securities.
Importantly, the land does not have to be in the UK. If you have agricultural land and property in the Channel Islands, the Isle of Man or a European Economic Area, your estate can claim APR to reduce the tax bill.
However, APR does not apply to all farmland and properties. For example, it cannot be claimed in relation to derelict farmland, pony-riding paddocks or farm cottages which are not occupied by farm workers.
How does APR apply in practice?
If the property qualifies for APR, you must then consider whether it is likely to satisfy the length of ownership requirements. Generally, if you or your spouse live in the property it must have been held and used for agricultural purposes for two years before the date of death; or seven years if someone else is in occupation, such as a tenant or family member.
If you worked the land yourself, or it is leased or let by you on a tenancy since 1 September 1995, the APR is 100 per cent of its value. In other cases, the relief is limited to 50 per cent. However, if there is any mortgage or other secured loans on the asset these must be deducted from the value before APR is applied.
What if you inherited the farm or property? The period of ownership is then calculated from the date of the death of the person from whom you inherited it.
Where APR is available you may have to consider whether it can be claimed in respect of the full agricultural value of the property. This is because the asset will be valued as though it can only be used for agricultural purposes so any value above the ‘agricultural value’ will not qualify. This means if part of the farmhouse, for example, is used as a bed and breakfast business, a proportion of the overall value of the farmhouse reflecting that business will be excluded for APR purposes.
Can business property relief also be used?
Farming property can also qualify for business property relief, but you cannot claim both. If the land or property qualifies for both forms of relief APR must be claimed first.
The overlapping of APR and business property relief is a complex issue and legal advice is necessary. For instance, in our bed and breakfast example above, APR can and should be claimed on the agricultural value – but business property relief can then be claimed on the value given to the bed and breakfast business. This then raises the issue of apportionment of the two reliefs which needs detailed consideration.
Agricultural property relief on lifetime gifts
You can make a gift of agricultural property to a loved one during your lifetime and this can also qualify for APR. However, there are certain conditions to be satisfied if you were to die within seven years of making the gift, or if you reserve a benefit such as the right to continuing living in the property.
This means if you are thinking about making a lifetime gift of farming property, we strongly recommend you speak to our specialist solicitors about how APR can work effectively for you and your loved ones.
For further information, please contact the wills, trusts and estate planning team on email at [email protected]. Warners Solicitors has offices in Tonbridge and Sevenoaks, Kent.
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.