Changes to the geographical scope of inheritance tax agricultural property relief

Changes to the geographical scope of inheritance tax agricultural property relief

At the Budget in March 2023, the government announced plans to restrict the geographical scope of Inheritance Tax (IHT) Agricultural Property Relief (APR) and woodlands relief to property located in the UK only. This means that agricultural property located in the Channel Islands, the Isle of Man, the EU, Norway, Iceland and Liechtenstein will no longer attract relief, and will be treated the same as other property located outside the UK.

The legislation has now been passed and this change will have effect on and after 6 April 2024 in relation to:

• transfers of value
• other occasions on which tax falls to be charged
• other events in respect of which additional tax falls due under the Inheritance Tax Act 1984

Who is likely to be affected?

This tightening of the rules potentially affects individuals, personal representatives and trustees where there is an interest in agricultural land and property and/or woodlands located outside the UK in either the European Economic Area (EEA), the Isle of Man, or the Channel Islands.

The background to the legislation

APR is a relief from IHT available on the agricultural value of land and other property that is owned and occupied for the purposes of agriculture. This will usually be land, pasture and associated buildings that are used to grow crops or to rear animals, although the definition of agriculture and the legislation for APR is evolving as the farming market develops.

Relief is due at 100% of the agricultural value of the assets where the land is farmed in hand or it is let on a tenancy that began on or after 1 September 1995.  In any other case, the relief due will be at a lower rate of 50%.

There are stringent ownership criteria for APR to be in point. Broadly speaking, the property must have been owned and occupied for agricultural purposes immediately before transfer for 2 years if occupied by the owner or a company controlled by them. Where the land is let, it must have been owned and occupied for agricultural purposes for 7 years prior to transfer.

Woodlands relief is a relief from IHT available on the transfer of woodlands on death.  It is only available if all the conditions for the relief are satisfied.

Those liable for IHT may elect to exclude the value of the trees or underwood (but not the land itself) from an individual’s estate, provided that, if they had purchased it, the individual had owned the woodlands for 5 years.

Woodland is any land on which trees or underwood are growing so may include wooded parkland, strips of land with trees lining roads, or tree belts. Where the timber is subsequently sold, IHT will be due on the proceeds received on the sale of the timber.

What can you do?

It is worth remembering that in hand farms and commercially occupied woodlands may benefit separately from Business Property Relief (BPR), providing the ownership criteria are met. There are no geographical restrictions for BPR and so the loss of APR and/or woodlands relief might not impact the overall IHT profile where BPR is available.

The key is to identify before April 2024 any agricultural land and property located in the Channel Islands, the Isle of Man, the EU, Norway, Iceland and Liechtenstein that currently qualifies for APR but is not likely to qualify separately for BPR. This may include let farmland or shares in farming companies where the land is let by the company.

Once the land and property are identified, we can provide tailored succession and tax planning advice to mitigate the impact of the change in legislation. This might involve considering a gift before 6 April 2024 of the affected assets to the next generation or to a trust for future family benefit. Alternatively, the preferred course of action might be to reassess and restructure the business and to access BPR in the future.    

We are here to help

For further information on the issues raised in this insight, or for a more detailed discussion on land based businesses and succession, please get in touch with your usual Azets advisor or a member of our tax team.

Information correct at time of publishing, but may be subject to change in future. This article is for general information only and is not intended to be advice to any specific person. You are recommended to seek professional advice before taking or refraining from taking action on the basis of the contents of this article.