For most farmers, there is no better tool to reduce Inheritance Tax (IHT) than Agricultural Property Relief (APR). Introduced in the Inheritance Act 1984, it is available on gifts of land occupied for the purposes of agriculture, together with buildings and farmhouses (subject to certain conditions) used in conjunction with the land.
APR is usually only discussed on a death when the asset is passed down to the next generation. It doesn’t stop all tax being paid but with planning, it can be a great help to reduce the IHT burden.
How does APR work?
The crux of APR is that it works on the basis of agricultural value rather than market value. Agricultural value is lower than market value because it makes certain assumptions about the property on which it is based, namely, that it will continue to be used for agriculture and nothing else.
For example, if a farmer were to own 10 acres on the edge of a town with limited planning opportunities, this might be valued at £25,000 per acre as development land, meaning the total value of the land is £250,000.
But the agricultural value of the land might only be £10,000 per acre, valuing the total plot at £100,000.
The amount eligible for APR is just the agricultural value of £100,000 meaning that the difference, which in this example is £150,000, could potentially be subject to Inheritance tax at 40%.
The same applies with buildings, with farmhouses and cottages which are generally valued at around 30 per cent lower than market values.
What assets qualify for APR?
Agricultural property is defined as land or pasture that is used to grow crops or rear animals, as well as buildings used in conjunction with the land. The full list includes:
- Land used for growing crops
- Stud farms for breeding and rearing horses
- Short rotation coppice
- Land not currently farmed under Habitat Scheme
- Land not currently being farmed under a crop rotation scheme
- Some agricultural shares and securities
- Farm buildings, farm cottages and farmhouses.
Assets that don’t qualify for APR include:
- Derelict buildings
- Farm machinery and equipment
- Livestock
- Harvested crops
- Property subject to a binding contract for sale.
To qualify for APR, the property must have been owned or occupied for agricultural purposes for a minimum of two years immediately before its transfer. If the owner does not occupy the property, such as in the case of a Let Farm Tenancy, they need to have owned it for seven years to qualify.
Farm cottages must be occupied by someone who works on the farm, or a retired employee, or spouse/civil partner of a deceased employee. However, the stipulations for farmhouses go further. They must be ‘character appropriate’ and of a nature and size appropriate to the farming activity taking place.
From this point of view, it is helpful for the farm office to be in the farmhouse rather than elsewhere.
Care must be taken if an older farmer wishes to remain in the farmhouse after retiring as HMRC may no longer consider the house as the centre of farm operations. One way to avoid this is to let the next generation also occupy the farmhouse and run the farming business from there.
APR rates
APR is due at different rates depending on circumstance. Situations in which it is due at 100 per cent include:
- When the person who owned the land farmed it themselves
- If the land was occupied by someone else on a short-term grazing licence
- If the land was let on a tenancy that began on or after Sept 1, 1995, or there was a surrender and re-grant of an old AHA tenancy after Sept 1, 1995
- A property owned before March 10, 1981, would have qualified under Schedule 8 of the Finance Act 1975 if it had been transferred before that date
- The person had no right to vacant possession between 10 March 1981 and the date of the current transfer (e.g., Company AHAs)
Relief will be due at a lower rate of 50 per cent in any other case including land let on Agricultural Holdings Act 1986 tenancies which commenced after March 10, 1981.
For further advice on APR, inheritance tax or all forms of succession planning, get in touch on (01295) 270200 or fill in the contact form here https://www.whitleystimpson.co.uk/contact/.