Inheritance Tax and Agricultural Land in Environmental Agreements
Our COO, Kate Russell, attended a Farming Forum hosted in his constituency by the Chancellor, Rishi Sunak, with the Defra Minister for Farming, Victoria Prentis in May 2022. Kate took the opportunity to raise the issue of inheritance tax reliefs for agricultural land in environmental agreements. The current definition of “agriculture” for Agricultural Property Relief seems unlikely to cover land which is no longer in active agricultural use, where, for example, it is being managed for nature recovery, and this is deterring some landowners from participation. Kate asked the Chancellor to review the current definitions and offered an “oven ready” solution, which is explained below.
Agricultural Property Relief
Agricultural land which is occupied for the purposes of agriculture is, subject to certain conditions, eligible for up to 100% Agricultural Property Relief (APR) on its agricultural value from inheritance tax. APR can apply to agricultural buildings occupied with that land and to a farmhouse used for the day-to-day management of that land. APR is a significant relief in the mind of landowners and the landlords of tenanted land, as 40% of the value of their land is at stake.
The perceived problem
Where land is to be managed for nature recovery or environmental benefit so as to meet public policy aspirations, it may be withdrawn from agricultural use altogether or it may be used much less intensively if the land is occupied primarily for environmental purposes. The concern of landowners and their advisers is that the land and any associated farmhouse and buildings could then be ineligible for APR – to their substantial cost.
For example:
Defra’s proposed Landscape Recovery scheme is intended to deliver land use change away from agriculture for nature recovery.
Agreements are being sought to take farmland out of agricultural use to help meet nutrient neutrality requirements for the ecological condition of protected waterbodies.
The statutory regime for Biodiversity Net Gain, which comes into effect in 2023, will require land use change to deliver biodiversity which may include the cessation of farming.
The prospect of losing APR acts as a real and significant barrier to private individual landowners who might otherwise participate in such schemes and so hinders the delivery of the Government’s environmental policies. The alternative of Business Property Relief (BPR) might not be available if the use did not look like a business and is anyway less relevant to landlords.
Importantly, this barrier does not apply to conservation charities and other organisations which are not subject to IHT, so placing them at an advantage compared to private landowners.
A potential answer
Jeremy Moody, Secretary and Adviser to the CAAV, has suggested that one answer to this would be to build on the existing model of the now largely redundant s.124C of the Inheritance Tax Act 1984. This provides that land in agreements under specified Habitats Regulations is regarded as agricultural land and that this use is an agricultural use for Inheritance Tax. A similar provision was made for short rotation coppice. This offers a relatively straightforward “oven-ready” answer, giving a simple and very strong signal to landowners that the tax system supports rather than hinders the Government’s objectives. It would remove a reason for landlords to constrain tenants.
If this solution were to be adopted, it would be necessary to define the basis on which land would benefit from this provision but, following the model under s.124C, this could be by reference to it being:
in an agreement under a financial assistance scheme under the Agriculture Act 2020
subject to a conservation covenant under the Environment Act 2021
on the Biodiversity Net Gain register that is to be established.
Working together
Kate assured the Chancellor that the CAAV and others who have already made representations to HM Treasury on this important issue stand ready to assist in further discussions and to review drafting and practical points where this would be helpful.
Tellus Natural Capital thanks Jeremy Moody, Secretary and Adviser to the CAAV, for his assistance in preparing the briefing note which was presented to the Chancellor and on which this article is based.
28th May 2022