Agricultural property relief

Agricultural property relief is an attractive concept. It means owners of agricultural land can qualify for up to 100 percent relief from IHT, on the agricultural value of that land. But, while the concept sounds attractive, there are detailed rules to follow in order to qualify for the relief.

There are three qualifications that have to be met to gain agricultural property relief:

• first, the land has to meet the IHT definition of 'agricultural property'

• second, the property has to be occupied for agricultural purposes; and

• third, the land must be owned for at least two years if the owner farms the land. If the land is let by the owner to someone else who farms it, then it has to be owned by the owner for seven years and throughout that period occupied for agricultural purposes.

To qualify for 100 percent relief, the owner has to have the immediate right to vacant possession of the property, the right to obtain it within 24 months, or the property must be let on a tenancy beginning on or after 15 September 1995.

Relief will be available at 50 percent, if the agricultural property is tenanted, let on a tenancy beginning before 15 September 1995 and the lease has more than two years to run at the date of transfer.

While these are the main qualifications, there can be complications within each of them. Care needs to be taken, because HMRC looks closely at claims for agricultural property relief. Particular care needs to be taken where the value of the land is not entirely due to its agricultural value, for example, where planning permission might allow for the agricultural land to be turned into much more valuable residential land. There is no requirement in the IHT legislation for the owner to be a full-time farmer to qualify for the relief. The legislation says the land has to be used for agricultural purposes and the farmhouse has to be of a character appropriate to the farmland. It does not mention the need for the owner to be a full-time farmer residing in the farmhouse.

One important issue is where a farm is transferred to a trust. A gift to trust normally triggers an IHT charge at 20 percent. Land that qualifies for agricultural property relief will be exempt from this tax, if held for at least two years before the transfer.

The difficulty may be in knowing in advance whether land, and particularly the house, will qualify for relief. HMRC will not provide a view on whether agricultural land qualifies until there is an event that triggers a potential liability to tax, such as death or a chargeable lifetime transfer.