A Guide to Agricultural Relief

Agricultural relief is an important consideration for farmers and landowners looking to protect their assets and provide for future generations. By reducing the potential burden of Inheritance Tax (IHT) on agricultural property, Agricultural Relief offers a valuable solution for minimising tax liabilities that could otherwise force the sale of family farms or land. 

Whether you're an experienced farmer or new to land ownership, we're here to help you understand how Agricultural Relief works and how it can benefit you.

Inheritance tax on farms: when is it due?

What is Agricultural Relief?

Agricultural relief is widely considered to be the most effective way for farmers to minimise inheritance tax on agricultural land. It is available on plots of land that are used explicitly for agricultural purposes, along with any buildings that are also used specifically for farming. Agricultural land basically describes any area that has been used in the previous two years for the likes of:

• Crop growing
• The rearing/breeding of horses
• Short rotation coppice/ timber harvesting
• Any land not being farmed under a habitat scheme
• Any land not being used as part of a crop rotation scheme
• Farm buildings, cottages, and farmhouses.

The primary purpose of AR is to allow farmers and landowners to pass on agricultural assets without facing an unmanageable tax burden, ensuring that family farms can continue to operate without the need for a forced sale due to inheritance tax liabilities.

It’s important to note that AR is only applicable against the agricultural value of land being used for farming. This figure is not the same as the market value of all available land. Usually, the agricultural value of a plot of land concerns only farmable land and is much less than if the entire estate was being sold to developers. 

If you are considering estate planning, it’s advisable to take guidance from a legal specialist as soon as possible.

To qualify for Agricultural Relief, the farm must have been occupied and used for farming purposes for the past two years by the person transferring their estate. Alternatively, the property will need to have been owned by the person transferring their estate for the past seven years while being used for farming. In the latter example, the owner need not have personally occupied the land during the preceding seven years. 

Where applicable, the relief is often applied at 100%, though in some circumstances a reduced rate of 50% may be used. Determining the appropriate rate can be complex, which is why working with a legal advisor specialising in agriculture is usually the best way to approach inheritance tax on farmland. 

When is Agricultural Relief not applied in full?

While Agricultural Relief can provide up to 100% relief in many cases, there are situations where the relief is reduced to 50% when the property doesn’t meet all of the conditions needed for full relief.

Here are a few common scenarios in which AR might be reduced to the lesser rate of 50%:

• Diversification of Land Use: If the property includes land or assets that are not being used mainly for agricultural purposes, the value of those features might not qualify for 100% relief. For instance, if some of the land is being used for non-agricultural activities such as holiday cottages, or other commercial ventures, the relief might be restricted to 50% for that portion of the overall property.

• Farmhouses: Farmhouses that are occupied by the farmer and used for farming purposes will qualify for the full 100% relief, but some circumstances might result in a reduction. For example, if the farmhouse is not being used for agricultural purposes, or is not occupied by the farmer, the relief could be reduced to 50% or even excluded altogether.

• Conservation Purposes: Land used for nature conservation might not always qualify for the full 100% relief, particularly if the lands/woodlands are not actively being farmed or otherwise used for commercial agricultural purposes.

• Unused Land: If parts of the property are not actively used for agricultural activities, they might not be eligible for the full relief. This could include any portions that have been set aside, are lying fallow, or are being used for any other non-agricultural purposes.

Determining which rate of AR is applicable can be complex. If you’re concerned about the implications of inheritance tax on agricultural land, it’s important to seek advice tailored to your circumstances.

What is Business Relief?

If you have farming-related assets and are planning to pass them on, Agricultural Relief may not always cover the difference between agricultural value and market value. In these cases, Business Relief (BR) can be used to reduce the taxable value of business assets, such as land, buildings, or machinery, when transferring them through inheritance. 

The extent of the BR reduction depends on whether a share in the business is being transferred or specific assets are involved. To qualify for BR, the business must have been owned by the person transferring the estate for at least two years. Typically AR is applied first, followed by Business Relief to account for the remaining value.

Understanding Agricultural Relief can be challenging, as it requires in-depth knowledge of tax regulations and the specific issues faced by those in the agricultural sector. 

Our Agriculture professionals are deeply connected to farming businesses and share a passion for rural affairs. They offer clear, reliable guidance on managing inheritance tax for farms, helping you protect your assets and ensure they are passed on smoothly to future generations. A full-service legal and professional services business, we also provide expertise across family law, employment law, commercial business, and more.

With us, you get exclusive access to a network of over 1000 UK legal professionals ready to provide clear, end-to-end premium services tailored to your needs and region.

Whether you’re a farmer looking to minimise inheritance on your land or need further help with succession planning or looking to the future, contact us today for prompt, practical support.