There are some restrictions and pitfalls in Inheritance Tax (IHT) legislation which can mean not all of the value of your farm will qualify for Agricultural Property Relief (APR).
APR allows qualifying agricultural assets to be passed on free of IHT or at a reduced rate, but many farmers are unknowingly exposed to IHT liabilities due to the use of buildings and who is deemed to farm the land.
While reforms to restrict the scope of APR and Business Property Relief (BPR) are set to come into force on April 6 2026 – and there has also been speculation about possible amendments in the upcoming Autumn Budget – these issues, which primarily impact farmers who grass let some of their land, will still remain, so it is important to review your position.
Key questions farmers need to consider:
Are you an active farmer?
If you let out land under grazing licences, are you doing enough to be considered a working farmer? If you, as the landowner, are not responsible for carrying out tasks of husbandry such as applying fertiliser, controlling weeds, etc., HMRC will treat you as a passive landowner.
While APR may still apply to the land, if you are not an active farmer, no IHT relief on machinery, equipment, and other assets will apply, as Business Property Relief (BPR) will be denied. This may also have IHT consequences for the house and buildings.
Are your buildings occupied for farming purposes?
If buildings are empty, or used for storing surplus household goods, they do not qualify for APR.
If the grazier uses the buildings, then this is business use, but evidence is important, and ideally this should be documented in a written grassletting agreement.
Do your farm buildings have non-agricultural value?
APR is only given on the “agricultural value” of agricultural property.
This is the value of an asset if it can only be used for agricultural purposes.
Hence, farm buildings with potential for converting into residential use have non-agricultural value, therefore do not qualify for APR.
It may be possible to structure your business so that BPR can be claimed on this non-agricultural value, but this requires careful planning.
Is your house a farmhouse?
If HMRC can successfully argue that it is the grazier who is the working farmer, HMRC will deny any IHT relief on your house.
To get IHT relief on a farmhouse, it is necessary to show that the house is occupied by a working farmer.
Furthermore, the house must be of a character appropriate to the land being farmed.
This can lead to a situation where the house is deemed too grand for the land being farmed, or where the sale of land can result in there not being enough land remaining to justify relief on the house.
Successful IHT planning requires careful consideration and attention to detail if APR and BPR claims are to be maximised, resulting in the amount of tax payable being reduced.
