Introduction »

Minimizing IHT by maximising relief

Agricultural Property Relief (APR) is an important relief for landowners as it reduces the value charged to Inheritance Tax (IHT). During lifetime it is available to relieve a charge that might arise on a gift to trust. At death it has the effect of providing IHT relief on both estate assets and reducing any additional charges on lifetime gifts. The rate of relief is frequently 100% although some tenanted land only secures 50% relief to the owner. It is also necessary that the owner either occupied the property themselves for the purposes of agriculture for the two years prior to a transfer or that the property was occupied by someone else for the purposes of agriculture in the seven years prior to transfer.

A significant change in the scope of APR has been made following pressure from the EU. The relief used to be limited to property in the UK, Channel Islands and the Isle of Man but is now extended to property situated in the European Economic Area. This relief is effectively backdated although time limits mean that the earliest year which may now benefit is the tax year 2007/08.

The property must fall within the definition of agricultural property. Bare land used for agriculture qualifies without restriction. Problems can arise where a claim is made for APR in respect of buildings, especially residential buildings on the farm. The requirement is that the buildings must be occupied for the purposes of agriculture and must be of a character appropriate to the agricultural property.

A recent case has held that a property left unoccupied because the farmer was in hospital and then a nursing home could still qualify because all his effects were still in the property and he was playing an active role in the business almost up to his death.

The issue of large residences claimed as farmhouses remains a problem area and one in which HMRC are likely to take an interest. It is clear that HMRC expect to see that the farming operations are controlled from the house and will then consider whether its character is appropriate. This will involve looking at the physical size of the house and its relationship to the farm. A large property with a small area of farmland may struggle to qualify for relief. HMRC accept that the issue is a question of fact in each case.

Agricultural purpose

Assuming that the property qualifies as agricultural property it must still pass a test of being used for agricultural purposes. These are not comprehensively defined in legislation, apart from one or two exceptions such as the breeding of racehorses on a stud farm which is given specific legislative approval. However other common farming activities do qualify and HMRC also accept that seed and tree nurseries and growing grass for turf all qualify. On the other hand, occupation for livestock other than for food for human consumption does not qualify. Neither does sporting rights nor the use of land for purposes other than agriculture such as grouse moor. Schemes to preserve habitat for wildlife will generally qualify if it is managed in the right way.

This relief and other IHT reliefs may be available on lifetime gifts as well as on your estate so if you would like us to review their availability please do not hesitate to contact us.

Introduction »