Agricultural Property Relief (‘APR’) – possible expansion?
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The headline concerning Agricultural Property Relief (APR) on budget day was that the scope of the relief from inheritance tax will be limited to property in the UK and no longer be available on property located in the European Economic Area, the Channel Islands or the Isle of Man from 6 April 2024.
However, hidden amongst the documentation in a consultation on the “Taxation of environmental land management and ecosystem service markets” were proposals to expand and modernise the relief, also prompted by post- Brexit considerations.
The UK is moving away from the EU’s system of agricultural subsidies to a bespoke UK system of Environmental Land Management schemes (ELMs), with an emphasis on encouraging the provision of environmental goods and services alongside food production. However, this raises concerns that the current qualification criteria for APR is incompatible with the drive to switch some land usage from agricultural to environmental, which prevents some landowners and farmers from making this change. At present land that has been taken out of agricultural production over an extended period for an environmental scheme or project is unlikely to qualify for APR unless it falls within the remit of certain specified land habitat schemes etc.
The basic idea which is being consulted upon is to expand the definition of “agricultural land” so that APR will continue to apply where land use changes from agricultural to environmental, and that land attracts ELMs relief in England (or under equivalent schemes in Scotland, Wales, and Northern Ireland). It is possible that this treatment could also apply to land subject to other environmental land management agreements which do not benefit from government assistance. However, there is an argument that the extension should be limited to land in specific environmental schemes so that the tax reliefs support the policy objectives and the government has a degree of control. The changes are intended to apply only where the usage has changed from agricultural to environmental (not on land that has never been used for agricultural purposes) and that any extension of APR should exclude the hope and development value of the environmental land.
The industry view has long been that if the government wants to encourage farmers and landowners to move towards the ELM schemes then restricting relief to land in agricultural occupation will be a disincentive and is effectively a block on policy. At present owner occupiers who want to pass on the holding to family may not enter certain schemes. Equally, landowners may not permit tenants to remove land from agriculture to enter some of the schemes because that will prevent APR applying for the landowner; clauses are sometimes inserted into Farm Business Tenancies to require tenants not to enter environmental schemes. This can clearly be a problem for tenants and one answer to this is to legislate to prevent such clauses, but ideally landlords and tenants should act cooperatively when assessing their differing interests and that would clearly be assisted if any change of use is tax neutral.
Separately, the consultation suggests that 100% APR could be restricted to farm business tenancies under the Agricultural Tenancies Act 1995 of at least 8 or more years and secure agreements under the Agricultural Holdings Act 1986, although it is acknowledged that some exclusions may be required. This takes forward a suggestion in a previous report known as the Rock review. The consultation asks for views on how to achieve these changes in such a way that they don’t have a damaging impact on the rented sector and tenant farmers. A concern is that this change will incentivise landlords to take land back in hand wherever possible, often to enter into contract farming arrangements. This is already a general trend because such arrangements may qualify for Business Property Relief (BPR) which offers greater relief from IHT and more flexibility than APR. If a landlord will be locked into a tenancy for a minimum of 8 years, that is likely to be a real disincentive to letting land. It is hard to see how this proposal would not harm tenant farmers.
The consultation ran until 9 June 2023 and the responses will inform policy development before the government makes decisions on these issues, including whether to make any changes to current policy. It will be interesting to see if and how these ideas are taken forward.
