Agricultural Property Relief and Business Property Relief are important exemptions from Inheritance Tax that allow smaller businesses and farming businesses to be passed down to future generations avoiding what can be a significant Inheritance Tax charge. They are somewhat controversial with calls to limit or abolish both on the basis that they are too generous and open to abuse. So, is it right that some families and small businesses should be entitled to escape an Inheritance Tax liability whilst others aren’t, and is it sensible to now level the playing field?
What is Agricultural Property Relief?
Agricultural Property Relief (APR) is a relief from Inheritance Tax. It is available on the agricultural value of agricultural property which is transferred either in lifetime (a gift) or on death. It can include woodlands, buildings, grazing and cottages, farm buildings and farmhouses, provided certain conditions are met.
In order to qualify for APR the property must have been:
- Occupied by the owner for agricultural purposes for at least 2 years up to the transfer/death, or
- Owned for at least 7 years up to the transfer/death and throughout that period have been occupied by another for agricultural purposes.
The rate of relief if available is 100% unless certain conditions apply, in which case the rate of relief is limited to 50%.
Currently, a property may be owner-occupied or let, and the property can be in the UK, Channel Islands, Isle of Man or European Economic Area. However, measures are being introduced to restrict the geographical scope so that it is only property located in the UK that will qualify on and after 6 April 2024.
What is Business Property Relief?
Business Property Relief (BPR) is another form of Inheritance Tax relief. It works by reducing the taxable value of business assets by either 50% or 100% depending on the nature of the asset and how it is used. To qualify for BPR the relevant assets must be owned for two years.
You cannot claim BPR on the value of an asset that you have already claimed APR on. However, a farming business may find that BPR is available on the value of an asset not fully covered by APR if the conditions are met.
Government consultation
Earlier this year (2023), the Government ran a consultation which amongst other things was to consider the scope of APR including expanding APR to allow for non-agricultural land stewardship schemes and tightening APR for landlords so that they only get 100% where the tenant has an interest of at least eight years. At the time of writing the outcome of this consultation is still awaited.
In 2019, the Office of Tax Simplification published its second review of UK Inheritance Tax. Although there were concerns at the time that the recommendation might be to abolish BPR, instead the report recognised the important role BPR plays in ensuring businesses can pass from one generation to another.
The arguments against
Whilst the Tory Party considers whether to reduce or even abolish Inheritance Tax, with a General Election now likely next year, the Labour Party is considering scrapping or restricting both APR and BPR.
It is estimated that as much as £1 billion in Inheritance Tax a year is forgone as a result of APR and BPR. They are both a type of relief that is open to abuse. Opponents of the relief make a number of points in support of the case for reform, not least that:
- In the case of tenanted farms and ownership of shares there is often no reason why there should be any business disruption in the event of the death of an owner.
- That owners of assets that qualify for APR in effect get the benefit of double tax relief as the capital gains charge on gains they made during their lifetime on the property in question is cancelled on death.
Implications of reform
The existing APR regime safeguards family farms. Abolishing these reliefs could make smaller farms untenable and force families to sell. Many farming families are already struggling to remain viable and to impose this additional burden could seriously affect the long-term future of English farming and agricultural production as a whole.
The main purpose of business relief is to ensure a business can continue operating after the death of an owner. But it also offers tax planning opportunities for those who invest in the Alternative Investment Market (AIM). The AIM is a sub-market of the London Stock Exchange and is designed to help smaller companies access capital.
Individuals who don’t own a business can access business relief by investing in private AIM-listed companies likely to qualify. The benefit of this is that the money is free of Inheritance Tax after just two years (compared to the Inheritance Tax seven-year rule). And you still have access to the money if needed.
By abolishing BPR, you not only disincentivise both business owners but also future investment in business, undermining that vital investment in smaller, riskier businesses. This in turn can and does have an impact on national economic growth and industry.
So whilst there may be an arguable case for reform including a case for deferment of Inheritance Tax payments, in the face of continuing economic uncertainty, abolition of these two important Inheritance Tax reliefs should not be seen as just a quick win for the Government’s coffers and could result in a damaging home goal.
If you would like advice for assistance with any Inheritance Tax, Agricultural Property Relief and Business Property Relief, please get in touch today.