Agricultural Property Relief (APR) can be a valuable inheritance tax relief. Marc Dorsett of Gepp Solicitors explains what APR is and how you can use it to minimise the amount of inheritance tax payable on death or on lifetime gifts.

What is Agricultural Property Relief (APR)?

Agricultural Property Relief (APR) is an inheritance tax relief on agricultural property set out in the Inheritance Taxes Act 1984 (IHTA 84). APR can reduce the inheritance tax payable on lifetime gifts of agricultural property that aren't potentially exempt transfers, as well as the agricultural property in a deceased's estate.

What counts as agricultural property?

Agricultural property is defined in IHTA 1984 as “agricultural land or pasture and includes woodland and any building used in connection with the intensive rearing of livestock or fish if the woodland or building is occupied with agricultural land or pasture and the occupation is ancillary to that of the agricultural land or pasture.”

It also includes cottages, farm buildings and farmhouses, alongside the land occupied with them, that are of a ‘character appropriate’ to the property. The term ‘character appropriate’ depends on several factors, including whether the farmhouse is of an appropriate size to the land farmed, how long it’s been a farmhouse and if an ‘educated rural layman’ would consider it to be a farmhouse.

The test of whether a farmhouse qualifies as agricultural property can be a complicated one but there is case law which can be useful. Essentially a farmhouse should be either:

• a dwelling where the farm is managed (Rosser v IR Commrs [2003])
• the place where farming operations are conducted (CIR v John M Whiteford & Son [1962] and Charnley & Another v HMRC [2019])

For APR to apply the agricultural property can be situated in the UK, Channel Islands, Isle of Man or a country in the European Economic Area.

How long do you need to have owned the agricultural property to qualify for Agricultural Property Relief (APR)?

For APR to apply, the land must have been either:

• occupied by the donor for the purposes of agriculture for at least two years prior to the transfer
• owned by the donor for at least seven years before the transfer and occupied by them or a third party for the purposes of agriculture for the seven-year period

Can interests in partnerships and companies qualify for Agricultural Property Relief (APR)?

Agricultural property owned by individuals or partnerships can qualify for the relief and relief can also be claimed on shares in qualifying companies if:

• the company's assets include agricultural property
• part of the shares' value must be attributable to the agricultural property value
• the deceased had control of the company through holding the shares immediately before death

In addition, the company must have occupied the agricultural property for the purposes of farming throughout the two years immediately prior to death, or the agricultural property must have been owned by the company throughout the seven years immediately prior to death and used for the purposes of agriculture.

What are the rates of relief for Agricultural Property Relief (APR)?

The rates of relief available through APR can be generous but it’s important to note that APR will only apply to the agricultural value of the agricultural property, that is the value if it could never be used as anything other than agricultural property. Agricultural value and market value are rarely the same, leaving the balance taxable unless another relief, such as business property relief, applies.

The rates of APR are:

• 100% where the donor has the right to vacant possession immediately before the transfer or can obtain vacant possession within 12 months of the transfer
• 100% for agricultural property that is tenanted and the letting started on or after 1 September 1995
• 100% for agricultural property that is tenanted, the donor has had a beneficial interest in the property before 10 March 1981, and would have received the higher rate of relief under the provisions in place at that time
• 50% on agricultural property transfers where the land has been let before 1 September 1995

If business property relief is also available, the APR is given first on the agricultural value.

If the property is subject to a binding contract for sale, APR is not available other than in limited circumstances. However, if there is an agreement that the deceased's ‘personal representative(s)’ (the person(s) dealing with the estate) have an option to sell and surviving partners/directors have an option to buy the agricultural property, APR will still be available.

Can lifetime gifts qualify for Agricultural Property Relief (APR)?

If a lifetime transfer becomes chargeable on the death of the donor within seven years of making the transfer, APR will be available if:

• the original property was owned by the donee from the date of transfer to the donor's death or the death of the donee, if earlier, or qualifying replacement property was owned in the same period - there is an allowed period of up to three years between sale of the original property and acquisition of replacement of property to meet this requirement
• the property, or replacement property, is qualifying agricultural property immediately before the death of the donor
• the property is not subject to a binding contract of sale, unless relief is available by the purchase of qualifying replacement property

Essentially, if the donor dies within seven years of making a transfer of agricultural property the failed potentially exempt transfer will not receive the benefit of APR, even if it applied at the date of the gift unless it’s still retained by the donee.

About the author

Marc Dorsett is a Tax Associate at Gepp Solicitors. He has over 20 years' experience in providing high quality tax advice to clients, whether corporate bodies or individuals.

See also

Could gift allowance replace Inheritance Tax in the UK?

How do nil rate bands reduce inheritance tax?

Should you have different will trusts for different family members?

Find out more

Inheritance Taxes Act 1984 (Legislation)

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Publication date: 24 August 2020

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