inheritance tax

Inheritance tax relief for farmers: What you need to know

According to data from 2022, the value of farmland in England reached an unprecedented high, with the average price of arable land at £10,600 per acre.

Given that the average farm size in England is approximately 215 acres, family farms can easily surpass £2 million in value, even without factoring in the worth of the farmhouse.

Myerson Solicitor’s Wills, Trusts, and Probate Team discuss inheritance tax, RNRB, APR, and BPR for farmers.

Understanding Inheritance Tax (IHT)

In the United Kingdom, Inheritance Tax (IHT) is typically levied at a rate of 40%, unless specific exemptions or reliefs apply. Each individual is entitled to an allowance of £325,000 known as the Nil-Rate Band (NRB), which is taxed at 0%. It’s important to note that this allowance covers assets passed on both during a person’s lifetime and within the seven years preceding their death. As a result, this allowance can be depleted prior to death, potentially leaving the entire estate subject to taxation.

The Residence Nil-Rate Band (RNRB)

In addition to the NRB, there is an additional exemption of £175,000 called the Residence Nil-Rate Band (RNRB) if a person bequeaths their main residence to their direct descendants. However, there is a drawback to the RNRB. It is reduced by £1 for every £2 that an estate exceeds £2 million in value. It’s worth noting that any reliefs (discussed below) are not taken into account when calculating whether an estate exceeds the £2 million threshold.

Agricultural Property Relief (APR)

APR serves as the most valuable relief against IHT for farmers. In order for APR to be applicable, the following criteria must be met:

  1. The property must have an agricultural nature, which includes land, pasture, cottages, farmhouses, and other buildings suitable for agricultural use.
  2. The property must satisfy one of the following conditions:

– The transferor must have occupied the property for agricultural purposes continuously for two years leading up to the date of the lifetime gift or death.

– The transferor must have owned the property for the entire seven years prior to the lifetime gift or death, while someone (anyone) must have occupied it for agricultural purposes during the same period.

Generally, APR is granted at a rate of 100% when applicable, but in some cases, it may be reduced to 50%. This means that when calculating IHT, the agricultural value of the agricultural assets is reduced by either 100% or 50%. The law defines agricultural value as “the value which would be the value of the property if the property were subject to a perpetual covenant prohibiting its use otherwise than as agricultural property.”

If the transfer is a lifetime gift and the donor passes away within seven years or retains the benefit of the property, additional requirements must be met before APR can be claimed. Furthermore, if the agricultural property is subject to a binding contract for sale when it is gifted, APR is generally not permitted.

Business Property Relief (BPR)

As mentioned earlier, APR only applies to the agricultural value of agricultural assets. Farmland may attract attention from developers, resulting in a “hope” value due to development potential or individuals desiring to move from urban areas to the countryside.

In such cases, the actual value of the property may exceed its agricultural value. While APR does not cover this additional value, Business Property Relief (BPR) may be available instead. The applicable rate for BPR is 100% for a business or an interest in a business (e.g., a partnership share) and 50% for land, buildings, plant, or machinery owned by the transferor and predominantly used for business purposes. However, it’s important to note that the underlying business or partnership interest must also qualify for BPR.

To be eligible for BPR, the transferor must have owned the business interest or property throughout the two years leading up to the transfer, with exceptions being made for transfers between spouses upon death, where the survivor is credited with the ownership period of the deceased. Additionally, the underlying business must have been operated for profit and not primarily involved in dealing with securities, stocks, shares, land, buildings, or making or holding investments.

This requirement should not pose an issue for actively farmed agricultural enterprises. Similar to APR, BPR is generally not allowed if the property is subject to a binding contract for sale. Furthermore, BPR may be revoked if the property is transferred as a lifetime gift and the transferor passes away within seven years, unless certain conditions are met.

When property qualifies for both APR and BPR, APR is always applied first to the agricultural value, with BPR being applied to any excess value beyond the agricultural value. APR and BPR are applied before the NRB and RNRB, meaning that farming estates commonly pass on free of Inheritance Tax.

Written by Simon Cieluch, a senior associate in Myerson‘s Wills, Trusts, and Probate team. 

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