How Changes to Agricultural Property Relief Could Impact Farmers

Understanding Agricultural Property Relief (APR)

The October 2024 Budget has brought significant attention to Agricultural Property Relief (APR), following widespread protests by farmers. But what exactly is APR, who can benefit from it, and how will it change in the coming years?

What Is APR?

Agricultural Property Relief (APR) and Business Property Relief (BPR) are inheritance tax reliefs designed to reduce or eliminate the inheritance tax payable when certain qualifying assets are transferred. These transfers can occur during the owner’s lifetime or after death.

APR provides relief at two rates: 100% and 50%.

Qualifying for APR

APR applies to specific types of agricultural property, including:

• Land or pasture used to grow crops or rear animals.
• Growing crops.
• Stud farms for breeding and rearing horses.
• Short-rotation coppices (trees harvested every ten years).
• Land not currently farmed under habitat or crop rotation schemes.
• Milk quotas associated with the land.
• Certain agricultural shares and securities.
• Farm buildings, cottages, and farmhouses, as long as they are proportionate to the farming activity.

Importantly, the property must be part of a working farm located within the UK. However, APR does not extend to:

• Farm equipment and machinery (which may qualify for BPR instead).
• Derelict buildings, harvested crops, or livestock.
• Properties under a binding contract for sale.

Ownership and Usage Conditions

To qualify for APR, the agricultural property must meet specific ownership and usage criteria:

• If the owner, their company, or their spouse/civil partner occupies the property, it must have been owned and occupied for at least two years before the transfer.
• If occupied by someone else, the property must have been owned and occupied for at least seven years.

The 100% relief rate applies when:

• The owner farms the land themselves.
• The land is used under a short-term grazing license.
• The land is let under a tenancy agreement starting on or after 1 September 1995.

In all other cases, relief is capped at 50%.

Planned Changes Announced in the October 2024 Budget

Introduction of a ￡1 Million Cap

Significant changes to APR and BPR were announced in the October 2024 Budget. Starting from 6 April 2026, the 100% relief rate will be capped at ￡1 million of combined agricultural and business property.

For properties exceeding this threshold, the relief rate will drop to 50%, effectively subjecting the excess value to a 20% inheritance tax rate.

Implications for Estates

When combined with the standard inheritance tax nil-rate band (￡325,000) and the residence nil-rate band (￡175,000) for property passed to direct descendants, couples can potentially transfer a farm worth up to ￡3 million tax-free. This assumes neither spouse leaves an estate exceeding ￡2 million, as this would reduce or eliminate the residence nil-rate band.

Planning Ahead: How Farmers Can Mitigate the Impact

With these changes on the horizon, farmers should consider their options to minimize potential inheritance tax liabilities. Seeking professional advice is strongly recommended.

Passing the Farm Earlier

One strategy is to transfer the farm to the next generation during the owner’s lifetime. If the owner survives for at least seven years after the transfer, no inheritance tax will be payable.

To avoid an immediate capital gains tax (CGT) liability, gift hold-over relief can be jointly claimed by the transferor and transferee. Agricultural land qualifies for this relief if it meets the criteria for agricultural property under inheritance tax rules. This approach delays CGT liability until the property is sold.

Conclusion

The planned changes to Agricultural Property Relief represent a significant shift in inheritance tax planning for farmers. By understanding the updated rules and taking proactive steps, such as seeking expert advice and considering early transfers, farmers can better prepare for the potential financial implications.

Partner Note: IHTA 1984, ss. 115 – 124C.