Inheritance Tax (IHT) is chargeable upon a person’s estate primarily on all property that a person holds immediately prior to death. It is possible for a person to make lifetime gifts and these are known as ‘potentially exempt transfers’ or PETS. There is however a seven-year accumulation period for lifetime gifts made within seven years of the date of death. The rate of tax is 40% after deducting the current years nil rate band limit (currently £325,000) and any available unused nil rate band of a pre-deceasing spouse or civil partner. The Residence Nil Rate Band introduced in 2017 may also be available for estates of £2 million or less.
Why do agricultural and business property reliefs exist?
Farming and rural land-based businesses are multi-generational businesses and business owners would have to take a long-term view in business and environmental planning extending beyond a single generation. They are normally capital intensive, with strong balance sheets that reflect the value of fixed assets used in the business, but often with low incomes and profitability.
Agricultural property relief and business property relief are vitally important so that working farms or other land-based businesses with fixed assets do not have to be broken up to fund a tax burden on death, thereby damaging their economic potential or putting them out of business altogether. Indeed, when the Government first introduced these inheritance tax reliefs, it was on the basis that tax charges, when there is a change of ownership of family businesses, were viewed as having a “damaging effect on risk taking and enterprise within a particularly important sector of the economy.” This rationale has not changed. It is also the reason why agricultural reliefs have been in existence since the late 19th century when estate duty was introduced. Using IHT reliefs to pass on the family farm is not about avoiding tax; it is about facilitating the long-term stewardship of the land and keeping the family business going.
Agricultural Property Relief (APR)
APR is a relief from IHT. If an asset complies with all the detailed conditions in the legislation, APR will be available to reduce by a set percentage, the otherwise taxable value of the asset. APR will be available on the agricultural value of agricultural land which is transferred on death (or in lifetime). APR will not be available on any non-agricultural value, for example development value. The land can be owner-occupied or let out on a tenancy with different conditions applying to each (see below). The land must satisfy one of the ownership and the occupation conditions.
- The APR ownership condition: the land must be owned by the landowner AND used for agricultural purposes (i.e. farmed) throughout the seven years immediately before death or transfer. (Please note that broadly, APR is normally available at 100% unless the land is let on a tenancy which began before 1 September 1995; in which case, relief is limited to 50% if the owner is not entitled to vacant possession within 12 months or by concession within 24 months).
- The APR occupation condition: the land must be owned by the landowner AND used by HIM/HER for agricultural purposes (i.e. farmed) throughout the two years immediately before death/transfer.
The agricultural value of agricultural property is defined by section 115(3) IHTA 1984 as the value the agricultural property would have if it were subject to a perpetual covenant, prohibiting its use otherwise than as agricultural property. In some cases, the agricultural value of the property may be less than the open market value. This might be because of development value, mineral value or because the farm or farmhouse would be desirable to a life style buyer. The assessment of agricultural value is a matter for the District Valuer to advise HMRC upon.
Woodlands generally only qualify for APR if the woodland is occupied with and ancillary to land attracting APR. Where farmland is let to a tenant but the owner has retained the woodlands in hand, then the tenant is occupying the farmland so the owner will not get APR on the woodland.
APR must be applied before Business Property Relief (BPR) but BPR may bridge the gap between the agricultural value and market value.
Business Property Relief (BPR)
BPR is another relief from IHT which may be available to a farming business. BPR is available at 50% where assets are used in a partnership but owned by a partner or at 100% where they are partnership assets.
Broadly, to attract BPR, the business must have been:
(1) A business or an interest in a business, e.g. a sole proprietor's business; and
(2) Owned by the transfer or / deceased for a minimum period of two years immediately preceding the transfer or death;
(3) Be carried on for gain;
(4) Not consist wholly or mainly of dealing in land or buildings or making or holding investments.
As BPR only applies to trading businesses and NOT investment businesses, any asset for which rent is received will be regarded as one that is an investment asset. In a recent case Green v HMRC  UKFTT 334 (TC), the First-Tier Tribunal has confirmed the approach in HMRC v Pawson (deceased)  UKUT 050 (TCC). It held that the starting point would always be that owning and holding land to obtain an income from it should be characterised as an investment activity.
The question of whether a business is mainly one of making or holding investments and therefore prohibited from qualifying for BPR under section 105(3) IHTA 1984 is one HMRC will investigate and reject claims for BPR. This can lead to a lot of correspondence and/or tribunal cases.
Particular problems can arise where there are several aspects to a business, one or more of which are non-qualifying activities, such as let cottages. This came up for consideration by the Special Commissioners in the anonymised case of Farmer and another (executors of Farmer, deceased) v Inland Revenue Commissioners (Spec 216), where there was a single business consisting of farming and of letting surplus properties on the farm. In that case it was held that the business and its activities had to be looked at in the round. On the facts of Farmer, the letting of properties was subsidiary to the main farming activity – and, although they were more profitable, the overall context of the business, the capital employed, the time spent by employees and consultants and the levels of turnover supported the conclusion that the business consisted mainly of farming. This approach was applied in the ‘Balfour’ case Brander v HMRC (2010) UKUT 300).
The "Balfour" case included consideration of a technical issue as to whether in the two years prior to death Lord Balfour had run a single business or whether for most of that time the Will trustees had a lettings business which was separate from Lord Balfour's in-hand farming activities. It was held there was a single business for IHT purposes (and applying the principles of Farmer the Tribunal went on to hold that it was not a business that was “wholly or mainly" an investment business).
How to Claim APR and BPR
When a potential IHT liability arises as a result of someone’s death, APR and/or BPR can be claimed as part of the IHT400 Inheritance Tax Account that will need to be submitted.
To claim APR, Schedule IHT414 will be needed. This gathers details about the land on which the relief is claimed, how the land is used, and any tenancies that may be applicable. It also requires further details if APR is claimed in respect of a farmhouse, cottage or farm building. It should be accompanied by a plan identifying the land in question, and a copy of any tenancy agreement.
Schedule IHT413 is used to claim BPR. If the asset on which tax is being claimed is a sole trader business, an interest in a partnership, or an asset used by a company or partnership, the details can be set out in that form; if the asset is a company shareholding then the details should instead be provided in Schedule IHT412. In the case of a sole trader business or partnership, you will need to provide a copy of the last three years’ accounts and any professional valuation, as well as any written partnership agreement.
Often APR and BPR may both apply to the same asset (for example, land that is being farmed by the owner). In that case, APR should be claimed in priority, but BPR can be claimed in addition if the APR does not cover the full value (e.g. if land has development value above the agricultural value).