Agricultural Property Relief – taxing times ahead?
We have had a huge response to the series of webinars we’ve just held to help launch the 2020 edition of The Rural Report, our annual publication for rural landowners and businesses.
4 minutes to read
During the Q&A sessions numerous questions were raised regarding the future of Agricultural Property Relief (APR) and Business Property Relief (BPR), which can be used to mitigate significant Inheritance Tax bills for rural property owners.
I thought, therefore, it would be useful to share a few of my thoughts on the subject.
APR
The key government reports that we anticipate may have an effect on these reliefs are The Office of Tax Simplification Report (OTS) of July 2019, which was followed in January 2020 with a 'Reform of Inheritance Tax' report, from the All Party Parliamentary Group Report (although this refers mainly to Capital Gains Tax).
The OTS report highlights the policy intention behind the reliefs provided by APR, namely to allow family farms and businesses to be passed on, without having to be broken up to pay the Inheritance Tax bill. This was clarified by Baroness Penn in the House of Lords in May 2020, where she cited the wording and confirmed that this was still seen as an important aim.
There is a lot of buzz around APR at present, but it ought to be treated with some caution and we would suggest the potential for significant change or even removal is speculation for now.
What is likely, however, is that there will be tougher policing of the requirements to achieve the relief. Jeremy Moody (Secretary and adviser to the CAAV) says: “In order to gain the tax benefits of being a farmer, one must actually be a farmer”, which involves true active management.
Active management or husbandry is the key ‘test’ to obtaining relief as proven in much of the relevant case law. However, if you are actively farming, it is likely you are also a trading business – and this we believe will be critical to future proofing, and crystallising the ability to claim reliefs. If APR were abolished, the ability to claim BPR would be crucial.
It is very important to note that BPR also allows a claim for 100% of the market value, while APR only accounts for the agricultural value (ie a perpetual covenant that land and buildings can only be used for agricultural use).
This often means the diversified elements or hope value of the asset may fall outside the agricultural value definition. This is something we frequently encounter when providing Inheritance Tax valuations and advice.
BPR
The OTS report recommends that the actual trading definition should be brought in line with other taxation rates, such as Entrepreneurs Relief.
The report recommends the non-trading element is limited to 20% - rather than the current position with BPR where the non-trading elements/investments cannot not be more than 50%.
BPR obviously has a much wider catchment than just agriculture, but the essence of the relief is to assist trading businesses – so the argument is that this reduction in the percentage would not affect those who are actually trading, and so the spirit of the exemption remains intact.
"A recent poll of professionals and private clients confirms they believe that it is a case of when, not if, the changes to BPR are made. So the time to act is now."
The Solution?
These potential changes mean businesses must consider the balance between trading and investment. This may be a suitable opportunity to review a business re-structure and succession planning. We recommend this is the time to act with a strategic plan and review, to ensure that businesses meet the various tests required in order to maximise available reliefs.
The benefit of planning ahead means that your estate is in order and your intentions are clear. The valuation and advisory team can assist as part of the review looking at the breakdown of values and apportionments.
Tom Heathcote head of our Agri-Consultancy team is advising clients to establish a trading farming business and helping them navigate the legislative and practical issues.
For APR, HMRC requires the landowner to be actively farming the land, managing it and taking business risks on it. HMRC do however recognise the use of agricultural contractors and other professionals to assist with the operation of the business. Tom advocates planning principally with BPR in mind and the use of joint ventures and cooperatives can help to achieve this.
The Rural Valuation and Advisory team operate nationally and work together with the regional offices to provide valuations and consultancy advice across all asset types.
For more information please contact Alice Huxley or Tom Heathcote