Farmland Inheritance Tax relief or ARP (Agricultural Property Relief)

There is a long-established inheritance tax (“IHT”) relief in relation to certain farmland and buildings. This IHT relief is called Agricultural Property Relief (“APR”) and can be available at a rate of either 50% or 100% depending upon how the farming business is structured.
Farmers need to be aware that APR is not automatically available on the whole value of the farmland and buildings. APR is available on the “agricultural value” of the farmland and buildings. This agricultural value is a method of valuation. In arriving at the value an assumption is made along the lines that the property concerned can only be occupied and used for the purposes of agriculture. This is akin to what is commonly known as an “agricultural tie”. If there is a difference between the market value (i.e. what the property is worth in the real world) and the agricultural value then APR is not available on the difference.
Let us assume that a farm complex includes a couple of stone barns which are capable of being converted into private dwellings. This possibility of conversion will have an effect on the market value of the barns. Let us say the barns, used for feed, medicines and sheltering cattle over winter have an agricultural value of £120,000 but a market value of £320,000 taking into account the development potential (sometimes called “hope value”). APR will only partially help with the IHT issue if the farmer who owns the barns dies.

This is where another IHT relief called Business Property Relief (“BPR”) becomes important. Like APR, BPR is available at different rates, either 50% or 100% depending upon how the farming business is structured. The rules for BPR are quite complex, but the basic premise, is that the farming business needs to be of a predominant trading nature and the business needs to have been owned by the individual for at least two years. If the barns are used for business purposes BPR should plug the gap between the agricultural value (relieved by APR) and the market value.
Some farms have started to rely on rent from holiday-cottages or residential property held on AST’s as part of the overall “trade” of the farming business. If the business is structured correctly BPR may be available on these types of property.

Farmers also need to be very aware of land which has development potential. Is there merit in them transferring this to the generation below before planning permission is obtained to save IHT? Farmers should explore this. However, the impact on the business, IHT anti-avoidance rules and Capital Gains Tax issues need to be considered as part of the decision-making process.

Our Inheritance tax specialists can assist farmers with advice about these matters. Please call Skipton Solicitor Liam O’Neill on 01756 692 883 or email
Liam O’Neill
Partner and Private Client Specialist
Tel: (01756) 692 883