The recently proposed budget changes to agricultural property relief and business property relief will change how the farming community approaches the passing of assets to younger generations.
A consultation has been announced to cover the impact on the farms and owners. Here’s a breakdown of the proposed reforms to Agricultural Property Relief (APR) and Business Property Relief (BPR):
Changes to Agricultural Property Relief from April 2025
APR will be expanded to cover land used in environmental agreements. This applies to land under arrangements with UK government bodies, devolved administrations, local authorities, or approved responsible bodies, enhancing tax relief eligibility for environmentally managed land.
Eligibility Criteria
To qualify for APR, the agricultural property must meet specific eligibility criteria designed to ensure that the relief is appropriately applied to genuine agricultural activities. Firstly, the property must be classified as agricultural property, which includes land or pasture used for growing crops or rearing animals intensively. This encompasses a wide range of agricultural activities, from traditional farming to more specialized operations.
Additionally, the agricultural property must have been occupied for agricultural purposes immediately before its transfer. If the property is occupied by the owner, a company controlled by them, or their spouse/civil partner, it must have been used for at least two years. If the owner does not occupy the property, it must have been used for at least seven years. This requirement ensures that the property has been genuinely used for agricultural purposes over a significant period.
The property must also be of a nature and size appropriate to the farming activity taking place. This means that the land and buildings should be suitable for the type of farming being conducted, whether it’s crop production, livestock rearing, or another form of agriculture. Finally, the property must be valued as if it could only be used for agricultural purposes, excluding any value attributable to its potential for alternative use. This ensures that the relief is based on the agricultural value of the property, rather than its market value for other purposes.
Agricultural Property
Agricultural property encompasses a variety of assets essential to farm operations. This includes land used for growing crops such as wheat, barley, or oats, which are staples in many businesses. It also covers land used for rearing animals like cattle, sheep, or pigs, which are integral to livestock farming.
In addition to the land itself, agricultural property includes farm buildings such as barns, sheds, and farmhouses that are used for agricultural purposes. These structures are vital for storing equipment, housing livestock, and providing shelter for farm workers. Farm cottages also fall under this category, provided they are occupied by someone employed in farming or a person who is a partner in the farm business. These cottages are often essential for housing farm workers close to their place of work, ensuring the smooth operation of the farm business.
Horticultural land, used for fruit or vegetable production, is also considered agricultural property. This includes orchards, vegetable plots, and other areas dedicated to growing produce. By encompassing such a wide range of assets, the definition of agricultural property ensures that various types of farming operations can benefit from property relief.
Business Property Relief
Business Property Relief (BPR) offers significant tax advantages for those transferring business property, providing relief from Inheritance Tax on qualifying assets. BPR can be claimed on the value of an asset that is not fully covered by Agricultural Relief, provided the asset is used for business purposes and not for agricultural purposes. This distinction is crucial as it allows for a broader range of assets to qualify for relief.
Qualifying assets for BPR include securities such as shares in a company, which can be a substantial part of a farming business’s value. Farm buildings like barns, sheds, and farmhouses used for business purposes also qualify, as do farm cottages occupied by someone employed in the business. Land used for business purposes, such as a stud farm or a farm involved in a crop rotation scheme, is also eligible for BPR.
To qualify for BPR, the business must be a trading company, and the asset must be used for the purposes of the company’s business. The asset must be valued as if it could only be used for business purposes, excluding any value attributable to its potential for alternative use. This ensures that the relief is based on the business value of the asset, rather than its market value for other purposes.
It’s important to note that BPR and APR are separate reliefs with different eligibility criteria. However, both reliefs can be claimed on the same asset if the eligibility criteria for both are met, providing substantial tax benefits for those involved in farming and other business activities.
Significant Changes and the Impact from April 2026
Estates with a combined agricultural and business property value of up to £1 million will continue to receive 100% tax relief. Over and above this amount, partial relief of 50% will be available. Any assets that only receive 50% relief will continue to receive relief at this level. If the owner has the right to vacant possession of the land within 24 months, full relief may be available. The treasury’s stated aim is to close inheritance tax loopholes and to provide focused relief to smaller family-sized farm estates. The change will address the effective tax rates larger estates currently pay.
Impact on Non-Listed Shares
(BPR) will be reduced from 100% to 50% for shares not listed on recognised stock exchanges (such as AIM). This will affect not only farms and agricultural land but also other business owners and investors using Business Relief Investments.
HMRC has stated that the proposed changes affect larger estates; however, we believe the impact will also affect smaller estates.
A statement from the National Farmers Union (NFU) President stated:
“The shameless breaking of those promises on Agricultural Property Relief will snatch away much of the next generation’s ability to carry on producing British food, plan for the future and shepherd the environment.
“It’s clear the government does not understand that family farms are not only small farms and that just because a farm is a valuable asset, it also doesn’t mean those who work it are wealthy.”
Trusts have sometimes been used to protect farm assets. However, the Chancellor has confirmed that Discretionary and Bare trusts will also be subject to the proposed changes.
A new £1 million IHT relief allowance will apply to property in trusts eligible for 100% relief. It will be charged every 10 years on qualifying assets. This also applies to exit charges when the property leaves a trust.
Trusts established before October 2024 will individually keep this allowance, while trusts created after that date by the same settlor will share a single £1 million allowance.
Agricultural Property Relief and Trusts
A deeper understanding of trusts provides insight into how they serve farm estate planning. Trusts, as legal arrangements, allow individuals to manage the ownership of their assets, which include agricultural land and property. With trusts, farmers can dictate the terms under which the assets are managed and eventually passed on.
For owners not occupying the land, it must be owned for seven years if let on a farm business tenancy (FBT) to qualify for relief.
Types of Trusts Commonly Used in Farm Estate Planning
Several trust structures are tailored to accommodate agricultural operations. Discretionary trusts allow trustees to decide how and when beneficiaries receive land and assets, offering flexibility and control over the estate’s distribution. Life interest trusts give beneficiaries the right to income or use of the property during their lifetime, reverting to other beneficiaries upon death. 18 to 25 trusts are particularly beneficial for catering to children until they reach maturity to manage their inheritance.
Interplay Between Trusts and APR Benefits for Agricultural Land
Trusts can be intricately connected with Agricultural Property Relief (APR), facilitating a smoother estate transition to the next generation while mitigating inheritance tax. When a property owner places farming land or buildings in trust, and the trust meets APR conditions, the assets typically qualify for relief. This can significantly reduce the potential inheritance tax burden when the trust’s assets are transferred, preserving more wealth within the agricultural operation.
Legal Aspects of Using Trusts for APR
A combination of legal directives steers the use of trusts in relation to APR. Trustees must adhere to the specific legal requirements of APR to ensure eligibility. The farmland or buildings must be occupied for agricultural purposes, and the ownership threshold—normally two years when owned directly and seven years when in a trust—must be met before the property qualifies for relief. Expert legal advice ensures that the structuring of trusts aligns with tax relief opportunities such as APR.
Chargeable Lifetime Transfers (CLT), Inheritance Tax, and Rysaffe Planning
Lifetime Transfers
The new rules will apply to lifetime transfers (gifts) made after October 2024 if the donor dies on or after April 2026. This includes property transferred into trusts, which would otherwise be taxed if held until the donor’s death.
Multiple Trust Arrangements- Rysaffe Planning
The intention is to consult on multiple trust arrangements, whereby successive trusts are taken out at different times. This is known as Rysaffe planning. The Chancellor would like to ensure only a single set of allowances applies, rather than each trust having its own set of allowances. The Treasury is concerned about inheritance tax avoidance.
Statistics from the policy paper
Although the policy paper provided statistics, they were presented positively. In reality, the figures showed.
· 27% of APR claims were for estates with over £1 million in agricultural assets.
· 60% of BPR relief claims were for non-listed shares
· Data represented 2012 to 2022 only
Financial Planning for farmers and their estates.
With the proposed changes, farms’ financial planning arrangements should be considered. Potential areas of financial planning that could be reviewed are:
· Make sure all business reliefs are available
· Gifting of assets earlier than expected
· Life Assurance written under trust to cover any potential liability
· Use of leasing rather than capital purchases
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· Sale and gifting of farm assets earlier than expected
The location of the farm office can significantly affect the availability of Agricultural Property Relief.
Estates continue to benefit from exemptions, including the standard nil-rate band, residence nil-rate band, and spouse or civil partner transfers.
Conclusion
Financial planning for farms and farmers’ estates is even more critical than ever. Forward-thinking planning can prove highly beneficial if it is approached correctly.
To find out more information or talk to us, please contact us.
Investment Commentary Q1 2022