HMRC Inheritance Tax: Customer Guide

Tell me about agricultural relief

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What is agricultural relief?

Agricultural relief is available on the agricultural value of agricultural property which is transferred. The agricultural property can be owner-occupied or let. Relief is only due if the transferor has owned the property and it has been occupied for agricultural purposes for a minimum period.

The relief operates in the same as business relief by reducing the value transferred by a transfer of qualifying agricultural property.

When is agricultural relief available?

Relief is available for transfers

  • in life
  • on death, and
  • when agricultural property is chargeable as settled property.

Relief is not normally available if the agricultural property is subject to a binding contract for sale at the time of the transfer.

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What is agricultural property?

For the purpose of the relief, agricultural property must be in the UK, Channel Islands, the Isle of Man or the European Economic Area. The term means agricultural land or pasture, but it also includes

  • any farmhouses, cottages or buildings, which are of a character appropriate to the property
  • woodlands and buildings used for intensive rearing of livestock (or fish), if those woodlands or buildings are occupied with agricultural land or pasture and the occupation is ancillary to that of the agricultural land or pasture (where woodlands are agricultural property, however, they are not eligible for the woodlands relief)
  • growing crops, when transferred with the land
  • stud farms engaged in the breeding and rearing of horses and land used for grazing associated with those activities
  • land and buildings used in the cultivation of short rotation coppice, for transfers on or after 6 April 1995. More on short rotation coppice.
  • any land within a habitat scheme for transfers on or after 26 November 1996. More on habitat schemes.

What is a milk quota?

A milk quota is broadly a producer's right to sell a fixed number of litres of milk a year without having to pay a penalty.

Where agricultural land, or an interest in agricultural land, is valued and the valuation of the land reflects the benefit of a milk quota, agricultural relief is available on that overall value. More on milk quotas.

What is the agricultural value?

The relief applies only to the agricultural value of agricultural property. This is the value the property would have if it could only be used as agricultural property.

The relief does not extend to any other element in the open market value of such property, for example

  • development value (though business relief may occasionally be available)
  • the additional value of a house as a desirable country residence.

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Tell me about farmhouses and cottages

Agricultural relief is allowable on the agricultural value of farm cottages occupied for agricultural purposes with agricultural land or pasture. To qualify for relief the farm cottage must meet the conditions about the period of occupation and ownership.

If the cottage has a value above its agricultural value because it could be attractive as a second home, for example, that additional value will not attract agricultural relief.

Normally a farm cottage or farmhouse occupied by someone who is not employed in agriculture will not qualify for relief. By concession, a cottage occupied by a retired farm employee or their widow, widower or surviving civil partner is treated as being occupied for agricultural purposes if either

  • the occupier is a statutorily protected tenant, or
  • the occupation is under a lease granted to the farm employee for his or her life, and that of any surviving spouse or civil partner, as part of the employee's contract of employment by the landlord for agricultural purposes.

What is the rate of relief?

Either 100% or 50%.

Agricultural relief is due at 100% if

  • immediately before the transfer the transferor had the right to vacant possession of the property or the right to obtain it within the next twelve months, or
  • land was let on a grazing licence
  • property is let on a tenancy beginning on or after 1 September 1995, or
  • the transitional provisions for let property apply

Relief is due at a lower rate of 50% in any other case (principally where property is let on a tenancy granted before 1 September 1995 and the transitional provisions do not apply).

When is transitional relief at 100% available?

In some circumstances land let on a tenancy starting before 10 March 1981 may qualify for relief at 100% on a transfer after that date.

The conditions are that the

  • transferor owned the land since before 10 March 1981, and
  • land would have qualified for full agricultural relief under Schedule 8 FA 1975 had it been transferred before 10 March 1981, and
  • transferor neither had nor could have had the right to vacant possession between that date and the date of the current transfer.

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What about relief on mortgaged property?

You should work out the part to which the relief applies if

  • the agricultural property that is transferred is subject to a mortgage or other secured liability, or
  • the relief is due on only part of the property that is transferred.

Example

Clarissa dies owning let land valued at £250,000. The rate of relief is 50%. Part is non-agricultural, and the agricultural value of the agricultural property transferred is £200,000. A mortgage of £60,000 is secured on the total property being transferred.

Item Amount
Value of agricultural property £200,000
Less proportion of mortgage applicable
to the agricultural property £ 200,000/£250,000 x £60,000
£48,000
Sub-total £ 152,000
Less amount of agricultural relief at 50% £76,000
Chargeable balance after relief £76,000
Value of non-agricultural property
(£250,000 - £200,000)
£50,000
Less balance of mortgage (£60,000 - £48,000) £12,000
Sub-total £ 38,000
Total value on which tax is chargeable £114,000

What happens to company shares and securities?

Agricultural relief also applies where shares or securities in a company are transferred if

  • their value can be attributed to the agricultural property which forms part of the company's assets, and
  • they gave the transferor control of the company immediately before the transfer
  • the agricultural property was
    • occupied for agricultural purposes by the company or the transferor for the two years immediately before the transfer, or
    • owned by the company for the seven years immediately before the transfer, and
    • occupied throughout that period by the company or another person for agricultural purposes, and
  • the transferor owned them for a corresponding period of two years or seven years, as appropriate.

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Does the full value of the shares attract relief?

The relief extends to that part of the value of the shares or securities transferred by a chargeable transfer, which is attributable to the agricultural value of qualifying agricultural property.

In some cases, the value of shares reduces under the rules that apply to sales of related property within three years after death. Then the relief is only available if the shares sold were themselves sufficient to give the transferor control at the time of death.

Is there a minimum period of ownership or occupation?

Yes, there are basic ownership or occupation requirements relating to agricultural property. The relief is only available if the agricultural property was either

  • occupied by the transferor for agricultural purposes for the two years immediately before the transfer, or
  • owned by the transferor throughout the seven years immediately before the transfer and throughout that period has been occupied for agricultural purposes (whether by the transferor or by another).

Additional tests have to be satisfied where a charge or increased charge to IHT arises because the transferor died within seven years of the transfer.

Points to note

  • If the transferor inherits the property on a death, ownership (and the period of occupation if it is subsequently occupied) runs from the date of that death.
  • If the transferor became entitled to the property on the death of a spouse or civil partner, relief is available for any period during which the spouse or civil partner owned or occupied it.
  • Relief is available when the transferred property replaces other agricultural property.
  • We treat occupation by a company that the transferor controls as occupation by the transferor.
  • If the transferred property was acquired on an earlier transfer, relief is available if
    • the earlier transfer was eligible for relief
    • the earlier transfer was made to the current transferor or the transferor’s spouse or civil partner
    • the property at the time of the current transfer was occupied for agricultural purposes either by this transferor or by the personal representatives of the earlier transferor
    • the property would qualify for relief apart from the occupation and ownership tests
    • one of the transfers occurs on death.

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Tell me about replacement property

If, at the time of the second transfer, the property replaces other property, the relief is restricted to that which would have been available had the replacement not occurred.

What if there is a non-arm's length sale

If the first transfer was a sale at less than the market value, the relief available on the second transfer is proportionally restricted to the element of gift in the first transfer.

Is agricultural relief available for a gift of agricultural property?

The following rules relate to potentially exempt transfers which become chargeable, or where further tax becomes payable on a immediately chargeable transfer, as a result of the transferor's death within seven years of the transfer.

Agricultural relief is available on property, which qualified for relief at the time of the gift, if that property

  • has been owned by the transferee throughout the period between the gift and the death of the transferor, or the earlier death of the transferee, and (subject to special rules for replacement property) is not subject to a binding contract for sale, and
  • is agricultural property immediately before the transferor's death, or the earlier death of the transferee, and has been occupied for agricultural purposes throughout the period between the gift and the death.

Is relief available if the gift was shares in an agricultural company?

If the property that was originally given consists of shares in an agricultural company, the relief is only available if the original shares, or those treated by the legislation as if they were the original shares, have been retained throughout the relevant period.

The agricultural property forming part of the company's assets must also have been

  • owned by the company, and
  • occupied for agricultural purposes.

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What happens if only part of the gift qualifies for relief?

If, at the date of the transferor's death, the conditions for relief are satisfied for only a part of the gifted property, a proportionate part of the value that was transferred is reduced.

If the transferee dies before the transferor the conditions for relief have to be satisfied at both the

  • date of gift, and
  • time of the transferee's death.

Does a change in the share capital affect how shares are treated?

If the transferee is given shares and, as a result of a reorganisation of share capital or take-over bid, receives other shares, we treat those other shares as the original property.

If, after the gift but before the transferor's death, the transferee receives shares in a company in consideration for the sale to that company of the property that has been given, the shares are treated as the original property.

What are the rules for replacement property?

Where the original agricultural property was disposed of before the transferor's death and the proceeds were used to buy replacement property, the relief is not necessarily lost.

In order to still qualify for relief

  • the whole of the sale proceeds must have been used to purchase the replacement property, and
  • both the sale and purchase must have been arm's length transactions taking place within three years of each other.

The replacement property must also be of such a nature that, if it was transferred by the transferee immediately before the death of the transferor, it would (apart from the minimum period of ownership requirement described above) qualify for relief.

Is relief available if a gift of a farming business is replaced with other property?

The donee of a potentially exempt transfer (PET) of a farming business may sell the business and replace it with a non-agricultural business. They will be denied agricultural relief on the value transferred by the PET. However, they can claim business relief if the conditions for that relief are satisfied.

In the reverse situation, the farming business acquired by the donee can be relevant business property.

What is the rate of relief for a gift?

Where tax, or further tax, is potentially payable, as a result of the transferor's death, the rate of relief that applies will depend on the rates in force at the date of death.

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Tell me about property replaced before a transfer by owner

This section deals with the relief available where property which would have qualified for relief before the transfer, has been replaced by other property.

The two year occupation condition is satisfied if the properties were occupied by the transferor, for the purposes of agriculture, for a total period of at least two years during the five years immediately before the transfer.

The seven year ownership test is satisfied if the properties were

  • owned by the transferor, and
  • occupied (either personally or by another) for the purposes of agriculture for a total period of at least seven years during the ten years immediately before the transfer.

Is agricultural relief limited if a replacement gives too much relief?

Yes. Relief cannot exceed what it would have been if the replacement had not occurred.

What if business property replaces agricultural property?

If business property replaces agricultural property which is part of a farming business, the period of ownership of the original property will be relevant for working out the minimum ownership condition to the replacement property.

Business relief will be available on the replacement if all the conditions for that relief are satisfied.

If a farming business is replaced by a non-agricultural business property, and the former is not eligible for agricultural relief, business relief may be claimed instead if the conditions for that relief are satisfied. More about business relief.

There are exceptions to this; for example, if agricultural land is not part of a farming business any replacement can only qualify for business property relief if it satisfies the minimum ownership conditions in its own right.

Tell me about the interaction of business relief with agricultural relief

If the conditions for both agricultural relief and business relief are satisfied then agricultural relief is available instead of business relief. However, business relief may be available on a transfer of agricultural property which is not eligible for agricultural relief.

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