What is Agricultural Property Relief? (3 Things You Must Know)

APR is a relief provided under the UK tax system to reduce or eliminate the IHT on qualifying agricultural property. By doing so, it allows farming families to pass on their businesses without the crippling tax burden that could otherwise force them to sell land or assets.

However, recent and planned changes to IHT proposed by the UK government are reshaping how APR works and may mean that farmland won’t pass to the next generation free of tax.

Here’s what advisors need to know:

Eligibility Criteria: How to Avoid Inheritance Tax on Farms

To qualify for APR, the property must meet specific conditions. Let’s explore these in detail:

1. Use of the Property

The property must be used exclusively for agricultural purposes. This includes:

• Growing crops: Whether it’s wheat, barley, or even specialist crops like lavender.
• Raising livestock: Sheep, cattle, and poultry farms qualify.
• Woodlands and orchards: If these are used as part of a farming business, they may also be eligible. However, if the land or buildings are used for non-agricultural activities such as tourism (e.g. converting barns into holiday lets), that portion won’t qualify for relief.

2. Ownership Period

• If the property is owner-occupied, it must have been owned and used for farming for at least two years before the transfer.
• If the property is let to a tenant, the ownership period extends to seven years, and the land must have been actively farmed during that time.

3. Types of Qualifying Property

Not every asset connected to farming is eligible. Here’s a rundown of what typically qualifies:

• Agricultural land: Fields used for crops or grazing.
• Farmhouses and cottages: These must be proportionate in size and character to the farm’s agricultural operations. A sprawling mansion on a smallholding will not qualify.
• Buildings and barns: If these are directly used for farming activities, they may qualify.

Rates of Relief

• 100% Relief: This applies to agricultural property that is owner-occupied or let under certain tenancies, provided all conditions are met. Value covered by 100% relief is effectively exempt from IHT.
• 50% Relief: This applies in only limited circumstances, mainly where land is rented under pre-1 September 1995 tenancy agreements.

The rate is applied to the agricultural value of the property, which assumes that there is a perpetual covenant over the property restricting its use only for agricultural purposes. It is often lower than its market value if it has potential for development or non-agricultural use.

A Practical Example of APR

Let’s look at an example to see how APR works in practice.

Imagine a farmer, Sarah, who owns a 100-acre farm valued at £2 million. Sarah has actively farmed the land for decades, and the entire property qualifies for APR. Upon her death, her executors claim 100% APR, meaning that no inheritance tax is due on the farm’s agricultural value.

Without APR, the 40% IHT rate would apply to the extent that the value exceeds the deceased’s available IHT nil rate band. Thus, a sizeable tax bill would be incurred, although it would be eligible for payment in ten equal annual instalments. Nevertheless, the family may need to sell the farm in order to settle the tax.

Thanks to APR, the farm stays in the family.

Common Misconceptions About Agricultural Property Relief

When advising clients about Agricultural Property Relief (APR), it's important to address several persistent misconceptions that can lead to costly mistakes in estate planning. These misunderstandings often result in unexpected tax liabilities or missed opportunities for legitimate relief.

Misconception 1: "All land owned by a farmer automatically qualifies for APR"

One of the most common misunderstandings is that any property owned by someone involved in agriculture will qualify for relief. In reality, HMRC applies strict criteria for agricultural use. Land must be actively used for agricultural purposes such as growing crops or rearing livestock. Parcels of land used for equestrian activities, commercial shooting, or recreational purposes typically do not qualify, even if adjacent to qualifying farmland.

Misconception 2: "APR and BPR are mutually exclusive"

Many landowners mistakenly believe they must choose between Agricultural Property Relief and Business Property Relief. These reliefs can work complementarily. While APR covers the agricultural value of property, BPR can apply to non-agricultural business elements, such as farm diversification projects or the additional value of land with development potential. Understanding this interaction is crucial for comprehensive tax planning.

Misconception 3: "Farmhouses automatically qualify in their entirety"

Perhaps the most contentious area of APR relates to farmhouses. Many assume that any house on agricultural land will qualify fully for relief. However, HMRC applies the "character appropriate" test, examining whether the house is proportionate to the agricultural activities. Larger, more luxurious properties may only receive partial relief or none at all if deemed disproportionate to the farming operation.

Common Pitfalls to Avoid

Even with clear guidelines, some common issues can trip up landowners:

• Farmhouses and Size Proportionality: If a farmhouse is excessively large or luxurious relative to the farming operations, HMRC may challenge its eligibility.
• Mixed-use Properties: Land partially used for non-agricultural purposes (e.g. renting to commercial tenants) will receive only partial relief.
• Recent Purchases: If land or property hasn’t been owned for the required duration, APR won’t apply (although there are replacement asset provisions to cover situations where the current farm has not been owned for long but has replaced earlier qualifying property).

Interaction with Business Property Relief (BPR)

APR can work in tandem with another tax relief; BPR. While APR applies to agricultural value, BPR can cover non-agricultural aspects of a farming business, such as diversified income streams like farm shops or renewable energy projects.

Here’s an example:

If a farm includes a wind turbine generating income, the agricultural land might qualify for APR, while the turbine operation could qualify for BPR. This dual approach can significantly reduce tax liabilities.

Recent & Planned Changes to Agricultural Property Relief

The most significant change to IHT proposed in the Autumn Budget 2024 is a reform of APR and BPR from April 2026. Currently, qualifying assets can attract relief up to 100% of their value from IHT with no overall cap on how much relief can be claimed.

It is proposed that relief at 100% will continue only for the first £1 million of combined agricultural and business property, with a reduced rate of 50% relief thereafter. This will produce significant IHT charges for high-value farms.

Key Considerations for Landowners

If you're a landowner or advising one, here are some crucial points to keep in mind:

• Mixed-Use Land: Only the agricultural portion of the land qualifies for APR. Diversified properties with commercial or residential elements may face partial relief.
• Future Tax Changes: Monitor planned reforms to both APR and CGT. Adjust your financial planning to minimise exposure to new rules.
• Professional Advice: Navigating APR requires expertise. Consulting a tax professional who is fully trained in personal tax matters can help ensure compliance and maximise relief.

Why Understanding APR Matters More Than Ever

As land values rise and the government seeks to close tax loopholes, APR is going to be restricted from April 2026. Advisors must stay ahead of the curve to avoid financial pitfalls for their clients.
Recent protests highlight the urgency of understanding these changes.

Farmers argue that tax burdens could undermine the sustainability of family-run farms and the agricultural economy.

Understanding APR and the wider implications of changes to IHT and CGT is essential for advising clients. If you're a tax professional, staying informed is the first step in navigating this complex landscape.

Join us for our Capital Gains & Inheritance Tax – Recent & Planned Changes course. This in-depth training covers the latest legislative changes to IHT and CGT, detailed insights into reliefs like APR and their practical applications, and strategies to optimise tax planning and protect assets.

FAQ

Can you claim APR and BPR together?

Yes, Business Relief and Agricultural Property Relief can be claimed together if the property qualifies for both. For example, a farm used in a business may qualify for APR on the agricultural value and BPR on the business value of non-agricultural assets. Eligibility depends on meeting specific conditions for each relief, such as the nature of the property and its use.

When was agricultural property relief introduced?

Agricultural Property Relief (APR) in its modern form was formally introduced in the Inheritance Tax Act 1984. This Act clarified and expanded the rules around inheritance tax, replacing capital transfer tax, and established APR as we know it today.