Agricultural property relief
Certain agricultural property is either not subject to inheritance tax at all, or is subject to it at a reduced rate of inheritance tax.
The relief is known as ‘agricultural property relief’ and it applies both to a gift you make during your lifetime and on your death. Relief is given on the agricultural value of the land, and whether it is available at a rate of 100% or 50% depends on who farms the land and how long the land has been owned.
In order to qualify for relief from inheritance tax, agricultural property must satisfy three criteria:
the land has to meet the inheritance tax definition of ‘agricultural property’;
the property must be occupied for agricultural purposes; and
the land must be owned for at least two years if the owner farms the land, or seven years if the land is let to someone else who farms it.
There are complications with each of the three qualifying criteria, and care needs to be taken as HMRC looks very closely at claims for agricultural property relief.
What is ‘agricultural property’?
To qualify for the relief, the property needs to be in the UK, the Channel Islands, the Isle of Man or the European Economic Area.
Agricultural property means any of the following:
agricultural land or pasture;
woodlands;
buildings used in connection with the intensive rearing of livestock or fish; or
cottages, farm buildings and farmhouses of a character appropriate to the property.
In order to be ‘of a character appropriate to the property’ the cottages, farm buildings or farmhouses need to be proportionate in size to the nature and size of the farming activity.
What is meant by ‘agricultural purposes’?
The following are normally accepted as agricultural purposes:
land set aside for permanent or rotational fallow;
cultivation of food for human consumption;
breeding or grazing of racehorses on a stud farm; and
keeping farm animals.
100% or 50% relief from inheritance tax?
To qualify for 100% relief, the owner must have the immediate right to vacant possession of the property or the right to obtain it within 24 months. 100% relief is also available for property which is let on a tenancy beginning on or after 1 September 1995.
50% relief is available for tenanted land where the lease was signed before 1 September 1995 or the landlord cannot get vacant possession within 24 months.
Do farmhouses automatically qualify for agricultural property relief?
Farmhouses are possibly the most controversial area of agricultural property relief, and there have been several cases where HMRC has tried to disallow the relief.
In order for a farmhouse to qualify it needs to be a working farmhouse rather than just a ‘gentleman’s residence’ surrounded by farmland. It is advisable for the farmer to live in the farmhouse, or for some element of the day-to-day farming of the land to be run from the farmhouse, so that it is definitely used for agricultural purposes in connection with the farming activity.
A common problem has been where a farmer has gifted large amounts of farmland to his children, so that on his death the farmhouse has simply been classed as a large house with a small bit of land attached to it. Care must be therefore taken if you are planning to give farmland away to ensure that the farmhouse will not fall foul of the agricultural property relief rules.
Business property relief
Certain business assets are either not subject to inheritance tax at all or at a reduced rate of inheritance tax. This relief is known as ‘business property relief’ and it applies both to a gift you make during your lifetime and on your death.
You will not pay any inheritance tax on:
unquoted shares (i.e. shares not traded on any stock exchange); and
any interest in a business you have (whether you are a sole trader or in a partnership).
50% relief from inheritance tax is available on:
quoted shares (i.e. shares traded on a stock exchange) where you have control of the company; and
assets, such as land and buildings, used by your partnership or company.
Do you have to own the business property for a certain period of time?
Generally, you must have owned the shares, business or assets for a period of two years before the gift or your death and they must not be subject to a binding agreement for sale.
Does it matter if part of the business is investment in nature?
Certain activities are excluded from the relief. If you have a business or company and its whole or main activity is securities, stocks or shares, land or buildings, or making and holding investments, relief will not be available. This does not mean that if you have any of these sorts of assets relief will automatically be disallowed, as they may genuinely be part of your business, but you must be careful that they do not dominate the activities of the business.
For example, if you have a farming business which also has some letting element to it, you must make sure that the letting business does not become the main part of the business so that it falls foul of the rules. It is advisable to take specialist advice to ensure that your business will qualify for relief.
Can the business property relief be used to reduce the amount of inheritance tax due?
Business property relief can be a useful tool to reduce a potential inheritance tax liability. Some people intentionally put their money into assets that will attract the relief in the hope that they will save inheritance tax further down the line.
This should be done with care though, as the government could take away the relief at any time and it is likely that costs could be incurred if a particular structure needs to be wound up.
Inheritance tax exemption for armed forces and emergency services personnel
There is an exemption from inheritance tax for serving, or former, members of the armed forces or emergency services who die while on active service or who later die from injuries sustained during active service.
Armed forces personnel
This exemption is usually granted automatically by the Joint Casualty and Compassionate Centre (JCCC) Deceased Estates. However, exemptions for veterans need to be applied for by the executors after the death of the individual. The Ministry of Defence will require access to the individual’s full medical records, and each case will be judged on its merits. The exemption does not apply to any gifts the individual may have made in the seven years before their death.
Emergency services personnel and aid workers
This inheritance tax exemption has now been extended to include all emergency services personnel in the UK who die on or after 19 March 2014 in the line of duty, or whose death is hastened by an injury that occurs in the line of duty. Humanitarian aid workers responding to emergencies, and police constables and armed service personnel, who die as a result of being attacked due to their status are also eligible for the exemption.
National heritage property
If you own property which is of importance to the UK’s national heritage, it may be that any inheritance tax due on a gift of that property can be deferred. Any claim must be made within two years of your gift or death and the recipient must agree to preserve the property and to allow public access.
Woodlands relief
If woodlands do not qualify for either business property or agricultural property relief, it may be that they qualify for woodlands relief if certain conditions are met. This relief defers any inheritance tax due.