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Julie Butler warns that Agricultural Property Relief for farmland has its limitations and may not cover the full value of the land.

Introduction

Farmland can benefit from both Agricultural Property Relief (APR) and Business Property Relief (BPR) for Inheritance Tax (IHT) purposes. APR is however restricted to “Agricultural Value”. The APR on farmland is therefore restricted to agricultural value. The principle of agricultural value is considered in relation to the farmhouse.

IHTA 1984 s 115(3) provides:

“the agricultural value of any agricultural property shall be taken to be the value of the property if the property were subject to a perpetual covenant prohibiting its use otherwise than as agricultural property.”

The agricultural value may well therefore be less than the open market value of the farmland because of planning permission for some form of development potential. Advisers need to consider any increase in value due to development or hope value or mineral value or because the farm is in a desirable part of the country. In these circumstances APR might not be available in respect of the excess in value of market value over agricultural value.

One area of current HMRC attack on IHT relief claims is to try and deny 100% relief on farmland farmed via a Farm Business Tenancy (FBT) on the basis that market value is greater than agricultural value and therefore only the element that relates to agricultural value achieves 100% APR relief. As the farmland is let, Business Property Relief (BPR) will not apply unless the FBT is part of a large undertaking.

It seems a long time ago since 1 September 1995 when the Farm Business Tenancy (FBT) was heralded as such a positive for farming. The main advantage was that 100% APR could be achieved on land let with a FBT.

The Lack of Protection of Business Property Relief

The value of land which represents the difference between market value under IHTA 1984 s 160 and agricultural value under IHTA 1984 s 115 needs the protection of BPR. There is a layer above the pure agricultural value of potential development land and there has to be BPR for IHT purposes to protect this value. However, something that not every landowner or adviser is prepared for when dealing with probate values is the District Valuer (DV) insisting that for an FBT the market value of land is over and above that of the agricultural value, where there is not necessarily any potential development value but some “special value” exists that places market value slightly above agricultural value. It is the fact that agricultural value can just be slightly less than the market value on a large amount of land that can lead to a large liability to IHT. However, if BPR is not available as protection such a potential attack on the “special value” must be fought and resisted with HMRC.

HMRC Collecting More Tax

This “special value” approach could be an effective way for HMRC to collect more IHT from let farmland. It has been accepted for some time that the difference between an Agricultural Holdings Act 1986 tenancy and land farmed with vacant possession is in the region of 50%. There are arguments being promoted that the agricultural value of the land under an FBT is only 70% to 90% of its full market value and therefore IHT is due to be paid on the difference. Even if the difference between agricultural value and market value on an FBT is only say 10%, with agricultural value being 90% of the whole, 10% of some very high value farmland could nevertheless be a considerable amount of IHT to pay by the estate of the deceased. Land agents will obviously be presenting strong arguments that market value equals agricultural value, especially as so much farmland has been recently purchased by farmers as opposed to investors at high values.

The Trade of Farming “In Hand”

Clearly it is important for landowners and their advisers to review all FBTs to ensure that the let land will qualify for the appropriate IHT reliefs. If there is any potential development land or “special value” land farmed through an FBT then consideration has to be given for changing from tenancy to “in hand” subject to the current terms of the FBT. It is a clear reminder, particularly with the “active farmer” elements of the CAP reform post 2013 of the single farm payment looming, that it is essential for landowners to farm “in-hand” as a trade as opposed to a letting activity wherever possible so there is the protection of BPR.

In addition, land farmed under an FBT does not qualify for the business Capital Gains Tax (CGT) reliefs, e.g. Entrepreneurs’ Relief and Rollover Relief which serves to endorse the view that for tax planning purposes all FBTs need review and serious consideration given to the trade of farming as opposed to a tenancy, to try and achieve maximum CGT reliefs and BPR for IHT as protection for the landowner.

The question follows, how easy is it for a landowner to change from an FBT to trading in hand? FBTs have limited security of tenure and, as long as the tenancy is outside its fixed term, the landlord should be able to give a notice to quit to bring the tenancy to an end. As long as the notice is a valid one and gives the required period of notice, the tenancy will come to an end and the landowner will be able to obtain possession. Professional help should be obtained from a land agent.

Practical Planning

One area of defence for agricultural value equalling market value, i.e., that there is no special value, is that many land agents and tax advisers consider that farmland currently has high agricultural value as so much  UK farmland is being purchased by farmers for farming compared to recent years with an increase of investors, lifestyle farmers and overseas buyers. It is therefore considered that market value equals agricultural value. There is much debate on the question of agricultural value.

The practical point has to be that all farm tenancies should be reviewed and the commercial advantages and tax reliefs of the trade of farming considered where HMRC could be in a position to argue that farmland has special or development value.