Protests by farmers following the October 2024 Budget have catapulted agricultural property relief (APR) into the spotlight. But what is the relief, who can benefit and how is it changing?

Nature of APR

APR and its companion relief, business property relief (BPR), are inheritance tax reliefs which reduce or eliminate the inheritance tax payable when qualifying assets are passed on, either during the transferor’s lifetime or on their death. There are two rates of relief – 100% and 50%.

APR is available in respect of land or pasture that is used to grow crops or to rear animals. It is also available in respect of:

·         growing crops;

·         stud farms for breeding and rearing horses;

·         short rotation coppice – trees that are planted and harvested every ten years;

·         land not currently being farmed under the habitat scheme;

·         land not currently being farmed under a crop rotation scheme;

·         the value of milk quotas associated with the land;

·         some agricultural shares and securities; and

·         farm buildings, farm cottages and farmhouses (which must be appropriate to the size of the farming activity taking place).

The property must be part of a working farm in the UK.

Farm equipment and machinery does not qualify (although this may benefit from BPR). Similarly, APR is not available in respect of derelict buildings, harvested crops, livestock or any property subject to a binding contract for sale.

To benefit from APR, the agricultural property must have been owned and occupied immediately before the transfer for at least two years if occupied by the owner, a company controlled by them or by their spouse or civil partner, or for at least seven years if occupied by someone else.

APR is given at the rate of 100% (so no inheritance tax is payable) if the person who owned the land farmed it themselves or if the land was used by someone else on a short-term grazing licence or let on a tenancy that began on or after 1 September 1995. In any other case, the relief is given at 50%.

Budget changes

A cap on the 100% rate of APR and BPR was announced in the October 2024 Budget. From 6 April 2026, the 100% rate will only be available on the first £1 million of combined agricultural and business property. Once this limit has been used up, agricultural and business property that would otherwise attract relief at 100% will instead only receive relief at 50% – an effective inheritance tax rate of 20%.

As APR and BPR are available in addition to the standard nil rate band of £325,000 and the residence nil rate band of £175,000 where a residence is left to a direct descendant, a couple can give away a farm worth £3 million before inheritance tax is payable (as long as neither leaves an estate valued at more than £2 million as this will reduce or eliminate the availability of the residence nil rate band).

Where the changes will expose the farm to a potential inheritance tax bill, it is advisable to take professional advice. Consideration could be given to passing on the farm earlier; there will be no inheritance tax to pay if the transferor survives seven years from the date of the gift. To avoid an immediate capital gains tax charge, gift hold-over relief can be claimed jointly by the transferor and transferee. Agricultural land which would not qualify for gift hold-over relief as a business asset qualifies if it counts as agricultural property for inheritance tax purposes. This will delay payment of the capital gains tax until the farm is sold.