What inheritance tax reliefs are there for farmers?

What inheritance tax reliefs are there for farmers? Melissa Hughes of GW Legal explains what you need to know about residence nil-rate bands, Agricultural Property Relief and Business Property Relief.

Illustration of a farmhouse

What are the current UK inheritance tax (IHT) laws?

The current rate of inheritance tax is 40% and is charged on the part of the estate (money, property and possessions) which does not benefit from exemptions and reliefs that is above the thresholds, also known as the nil-rate band. Everyone has a nil-rate band, which is currently set at £325,000 until 5^th April 2028, less any gifts of unrelieved property made to non-exempt beneficiaries in the 7 years before death. Although the nil-rate band is restricted for estates valued at more than £2 million.

For example, if you left an estate worth £650,000, the first £325,000 would be tax free and the remaining £325,000 would be taxed at 40% if no other exemptions, reliefs or allowances were available.

If you are married or in a civil partnership, you can pass your entire estate to your surviving spouse or civil partner, tax free when you die, meaning the surviving spouse can inherit your whole estate without having to pay any inheritance tax.

What is the residence nil-rate band?

If you own a property on your death which you have at some time used as a residence, your estate can also benefit from the residence nil-rate band if the property is being left to your direct descendants, which for this purpose includes step-descendants, or their spouses/civil partners. The maximum residence nil-rate band available is currently £175,000. This means your own personal threshold could increase to £500,000 (including the nil-rate band), although the residence nil-rate band is restricted for estates valued at more than £2 million.

Using the above example again, if you left an estate worth £650,000, the first £500,000 could be tax free and then only the remaining £150,000 might be taxed at 40%, again if no other exemptions, reliefs or allowances were available.

What happens to unused nil-rate bands?

You can pass any unused nil-rate band or residence nil-rate band to your surviving spouse or civil partner on death. If you did not use any of your nil-rate bands, your spouse or civil partners could essentially be topped up by 100%, leaving them with potential total nil-rate bands of £1 million when they pass.

What is Agricultural Property Relief (APR)?

For farmers, one of the most valuable reliefs from inheritance tax is Agricultural Property Relief (APR). APR is due at 100% on the agricultural value, that is the value of the asset if it could only be used for agricultural use in perpetuity, if:

at the date of the transfer you have the right to vacant possession or you would obtain this within the next 12 months.
land was let on a short-term grazing licence.
property was let on a tenancy that began on or after 1 September 1995.

APR is only available at 50% in all other cases.

For APR to apply, there is a two-stage test which must be met:

1. The property must be agricultural in nature.

Agricultural property that qualifies for APR is land or pasture, including woodland and any building that is used to grow crops or in connection with the intensive rearing of livestock or fish. It also includes:

farm buildings, farm cottages and farmhouses
some agricultural shares and securities
stud farms for breeding and rearing horses and grazing in connection with those activities
trees that are planted and harvested at least every 10 years
land not currently being farmed under the Habitat Scheme
land not currently being farmed under a crop rotation scheme
the value of milk quota associated with the land

Things that do not qualify for APR are farm equipment and machinery, derelict buildings, harvested crops, livestock and property subject to a binding contract for sale.

2. The property must have :

been occupied by the transferor for the purposes of agriculture throughout the two years before the date of the lifetime gift/death or
been owned by the transferor throughout the seven years before the lifetime gift/death and occupied by anyone throughout the same period for the purposes of agriculture.

For both of the above periods there are special rules where qualifying assets have been replaced with other qualifying assets before death.

If you inherit property, ownership runs from the date of death, or if inherited from spouse or civil partner from the date that they owned it.

What is Business Property Relief (BPR)?

Another vitally important relief from inheritance tax is Business Property Relief (BPR). BPR will usually be available for farming business property, such as the business bank accounts, farm machinery/plant, farmland, buildings and stock, as they are all used within the trade of farming. BPR will apply to the market value of assets above the agricultural value.

Where the conditions of BPR are met, the relief reduces the value of gifts made either during someone’s lifetime or on their death. The reduction in value is either 50% or 100%, depending on the type of property and how it is owned.

The conditions for BPR are as follows:

1. The asset must be a type that can qualify as relevant business property.

Assets which benefit from 100% relief are:

a business carried on by a sole trader
an interest in a business such as a share in a partnership
an unquoted company shares and securities

Assets which benefit from 50% relief are:

quoted company shares or securities which by themselves or with other shares or securities owned by the transferor gave the transferor control of the company
land, buildings or machinery owned by the transferor and used in a business they were a partner in or a company they controlled land, buildings or machinery used in the business and held in a trust in which the transferor was beneficially entitled to an interest in possession

You cannot claim BPR on shares in a company if the company:

mainly deals with securities, stocks or shares, land or buildings, or in making or holding investments
is a not-for-profit organisation
is subject to a binding contract for sale, unless the sale is to a company that will carry on the business and the estate will be paid mainly in shares of that company
is being wound up, unless this is part of a process to allow the business of the company to carry on

2. The property must have been owned by the transferor/deceased for more than two years, although as with agricultural property relief there are special rules where it is a replacement or has been inherited from spouse or civil partner.

3. The business must be carried on for gain and be wholly or mainly a trading business.

A lot of farmers would satisfy the requirements easily. However, problems can arise when there are several aspects to a business, one of more of which are non-qualifying activities. For example, family estates may include holiday or residential let properties and if these activities pre-dominated, BPR would not be available. In a hybrid farming business, however, if the non-trading activities were subsidiary to the main farming activity, BPR will still apply.

Summary

Often APR and BPR may both apply to the same asset. Where possible, APR should be claimed prior to any claim for BPR. You cannot claim BPR on the value of an asset that you have already claimed APR on. However, a farming business may find that BPR is available on the value of an asset which is not covered by APR, if the conditions have been met.

APR and BPR are vitally important for farmers so that working farms do not have to be broken up to fund a tax burden on death, damaging any economic potential or putting them out of business altogether.

Melissa Hughes gwlegal

About the author

Melissa Hughes is a Solicitor and Head of Wills & Probate at GWlegal, @GWlegal. With over 10 years’ experience in the legal industry, Melissa specialises in all aspects of Private Client matters, including the preparation of Wills, Probate, Estate Management and Lasting Power of Attorney.

Find out more

How Inheritance Tax works: thresholds, rules and allowances (GOV.UK)

Pay your Inheritance Tax bill (GOV.UK)

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Publication date

20 December 2023

Any opinion expressed in this article is that of the author and the author alone, and does not necessarily represent that of The Gazette.