Distinguishing between Agricultural Property Relief and Business Property Relief

Inheritance Tax (IHT) is payable on death on a person’s estate above their nil rate band (currently £325,000) at a rate of 40%.  In addition transfers out of a person’s estate by way of a gift are also taxable at a rate of between 20% – 40%, the rate charged being dependant on the nature and timing of the transfer.

There are some reliefs and allowances which help reduce IHT payable such as the £3,000 annual gift allowance and the small gifting allowance of £250 per person.  Two of the most substantial reliefs are Agricultural Property Relief (APR) and Business Property Relief (BPR).

BPR provides relief from IHT on the transfer of relevant business assets at a rate of 50% or 100%.  Relevant property must be held for at least 2 years in order to qualify.

APR is designed to prevent IHT from being so much of a burden to farming families that they are forced to sell their farms to pay the tax. APR applies only to agricultural land and buildings which have been occupied for agriculture as well as owned for a minimum period.

The application of these reliefs can involve substantial complexity.  For example APR application would include woodland if occupied with agricultural land, buildings used for intensive livestock or fish rearing, if that building is occupied with the agricultural land, cottages and farmhouses together with land occupied with them as are of a character appropriate to the property.

APR does not apply to woodland not occupied with agricultural land, buildings used for the rearing of birds and fish, though fish farms are eligible, paddocks for ponies used for recreational purposes, farms not occupied for agriculture, agricultural buildings which dominate the land rather than being ancillary to the land or farmhouses of a character not appropriate to the agricultural land.

However it is not uncommon for someone to claim BPR on assets which are not covered by APR for example, a farm could claim BPR on its vehicles, machinery and stock whilst at the same time claiming APR on its agricultural land. Similarly BPR could be claimed on buildings that used to be used for agricultural purposes but are now used for the holiday industry such as holiday cottages.

IHT planning as it applies to the application of APR or BPR reliefs can therefore be seen to be a complex business requiring in-depth analysis of how each asset is used and it is strongly recommended that advice from a suitably qualified independent financial adviser be sought.