The decision to impose a cap of £1m on the total value of combined agricultural property relief (APR) and business relief (BR) claims was one of the more controversial measures announced by Rachel Reeves in her first budget in October 2024. The announcement resulted in widespread protests and demonstrations from farmers worried about the impact the changes would have on their livelihoods and the ability for their farming businesses, which have often been in the family for generations, to continue into the future.
Before looking at the changes introduced to APR & BR and the options available to taxpayers in light of those changes, this article will provide an overview on the background of APR and also BR as it relates to farms.
Background
APR provides relief from inheritance tax (IHT) on the agricultural value of land and buildings. It generally applies in three circumstances, each of which provide 100% relief from IHT:
- Agricultural land and buildings actively farmed by the landowner
- Land let to a third party on a short-term grazing license
- Agricultural land and buildings let on a tenancy that began on or after 1 September 1995
In the case of the first point, to qualify for relief the land and buildings must be actively used for agricultural purposes by the owner for a minimum period of two years.
In the other two cases, where land is let to third parties, the owner will need to have owned the land for at least seven years before they become eligible for APR.
A farmhouse can qualify as an agricultural building and be eligible for APR provided it is essentially the “hub” from which the farming operations are conducted. It also has to be of a size and character suitable for the farm around it, which would preclude a country mansion with a small farming operation from gaining relief!
Farm cottages can also qualify for APR if they are occupied by farm employees, retired farm employees or the spouse or civil partner of a deceased farm employee.
Business Relief (BR)
Claims for APR are limited to the agricultural value of land and buildings. However, the total value of a farming operation is likely to be far higher than this as it will encompass not only valuable plant & machinery, livestock and crops but also the farmland itself may have a far higher value than its agricultural value alone, particularly if there is some potential for it to be developed for other purposes in the future.
In these instances, a claim for both APR and BR can be made on the value of a farming business. APR is given in priority and will cover the agricultural value of the land buildings. A claim for BR can then be made on the additional value of the business to provide an exemption on the full value of the business from IHT.
Limited Companies
Some farming operations are conducted through limited companies. Where this is the case, the asset owned by an individual will be shares in a company rather than land or buildings.
Where a company owns agricultural land, it is still possible for APR to be claimed on shares but relief will only be given if shares are transferred (either during somebody’s lifetime or on death) and the transfer results in the recipient having control of the company (which usually means owning more than 50% of the company’s shares).
APR is given on shares based on the value of the agricultural land the company owns as a percentage of the company’s overall assets. The same ownership criteria that relates to individuals applies (i.e. the company must own the land for at least two years if it actively farms it or seven years if it lets it out to a third party).
Shares in an active farming company should also be eligible for BR, so relief from IHT should still be given on the farming business as a whole.
