Can I get Agricultural Property Relief on all of my farm?

Short answer: Often not. Agricultural Property Relief (APR) only covers property that is genuinely occupied for agriculture, and only its agricultural value. The areas where claims most often fail are the farmhouse, land used for horses, and buildings or land used for non-farming purposes.

If we can start with a quick example:

A farmer might afford £10,000 per acre to buy farmland. However, a 1 acre paddock on the edge of a town might have planning consent for a new build house and be worth £100,000. So in this example, the field is worth £100,000, the agricultural value of that same field is £10,000, and therefore tax will be paid on the £90,000 difference. If, at the point of the death, that field wasn't used for farming, but instead was used for grazing horses, then the agricultural value wouldn't apply at all, and the tax would be calcauted on the £100,000 value.

It is for the above reason that farmers need to be very careful when letting land for pony grazing and even solar farms, because they might inadvertently be creating a problem for inheritance tax. 

1. The farmhouse: is it "of a character appropriate"?

This is our common question and is one of the trickiest matters to assess. A farmhouse can qualify for APR, but only if it passes several tests:

•      It must be a farmhouse: i.e the main dwelling of the person who runs the farm day to day.

•      It must be of a character appropriate to the property: in proportion to the land and the farming operation it serves. The courts look at whether the house is appropriate in size, content and layout to the farm buildings and land, whether an educated rural observer would see it as a farmhouse, its history, and the value of the house compared with the land.

•      It must be occupied for agriculture: the occupier must actually be farming the land.

A 12 bedroom period house with just 30 acres is likely to fail. It is quite common for an elderly farmer to contract farm or to rent out the farm, but in doing so, must be very careful to understand the implications for the farmhouse and potentially removing it's entitlement for APR.

2. Land used for horses

For inheritance tax, "agriculture" includes the breeding and rearing of horses on a stud farm, and the grazing of horses in connection with that. It does not generally include grazing ponies or horses kept for leisure, riding or livery.

•      Paddocks grazed by your own or your family's ponies usually do not qualify for APR.

•      Land let to a neighbour for grazing cattle or sheep usually does qualify.

•      A genuine stud farm breeding and rearing horses can qualify.

If part of the farm has drifted from sheep to ponies over the years, that land may have quietly fallen out of relief.

3. Other property that may not qualify

What should I do now?

•      Map the farm field by field and record how each part is used and by whom.

•      Keep evidence of farming activity: livestock records, cropping plans, grazing agreements and accounts.

•      Review the farmhouse position: who lives there, who makes the farming decisions, and how the house compares with the holding.

•      Get market and agricultural values so you and your advisers know where the £2.5 million allowance is likely to be used up.

At Fallows, we undertake a lot of tax planning exercises, whereby we inform land owners of their likely entitlement to APR,  and then plans can be made alongside their financial advisors.