With the general move towards ‘greener’ farming following on from the Health and Harmony consultation and the Agriculture Act, some concerns have been raised as to whether land which is put into long term schemes that are fundamentally environmental rather than agricultural will still be eligible for the existing Inheritance Tax reliefs.
Starting with the legislation, eligibility for APR relies on occupation of the land being for the purpose of agriculture. Under S115(2) IHTA 1984, agricultural property is defined as ‘agricultural land or pasture…(which) includes woodlands…if the woodland…is occupied with agricultural land or pasture and the occupation is ancillary to that of the agricultural land’. Note that the ancillary condition applies only to woodland so ancillary occupation of pasture or scrub will not enable eligibility for APR.
There is also a timing issue as to when the land ceases to be agricultural land or pasture. It may be agricultural at the outset. Having previously been used for cropping or livestock it is still initially agricultural, and at that stage there is probably a good argument that in a longer term perspective a few years of ‘fallow’ can be part of an agricultural rotation. After several years, however, there will be a change in that nature of the land, so that it is not only no longer producing agricultural outputs, but it is not even capable of such production without having time and money spent on it. At some stage in that transition, the entitlement to APR will have been lost.
Where the land has been deliberately planted up as woodland the position is more straightforward, since s115(2) will apply.
Where land is in stewardship under CSS or occupation under a Biodiversity Net Gain scheme, it would not appear to qualify since one would not be farming that land for husbandry and the land is not given the extended relief under s124c. The last advice received from HMRC on this is that absent any change to their current guidance it would be prudent to ensure that the land in question has been put to some agricultural use if APR is to be available. HMRC have not advised how ‘intensive’ that agricultural activity would need to be and any claim for APR would be decided on the merits of each individual case. The fact that land within specific habitat schemes is brought within APR by s124c IHTA implies that the intention of the legislation regarding habitat land is that it should only be relieved where specifically included within the s124c list. The fact that the list has not been revised for nearly 25 years undermined this somewhat but, nonetheless, as drafted the legislation is quite clear.
If APR cannot apply, we must then rely on BPR – this means we need to have a business carried out for gain which is not wholly or mainly one of investment nor a ‘hobby’ trade. So we would need to ensure there is sufficient activity on the ground above and beyond passive receipts for holding land. At one end of the spectrum one might see rewilding, basically leaving the land and seeing broadly what nature does and at the other end, active management for environmental purposes with payments on the back of it which could possibly be at sufficient level to be considered wholly or mainly trading. However, the position on this is untested.
Moreover, it is worth remembering that APR is only given for the agricultural value of the land, so where the act of rewilding has devalued the land for agricultural purposes but not its open market value, APR will cover less than 100% of the IHT value. This will not be the case where an argument for BPR can be sustained.
Finally, and beyond the initial terms of the question, it is worth remembering that income arising from stewardship will generally be outside the scope of VAT, so if there is no other standard or zero-rated income, input recovery may be lost.
So returning to the question, the eligibility of stewardship land for APR is likely to depend on where in the cycle of rewilding the land has reached and whether there is sufficient agricultural production for it still to be considered as used for the purposes of husbandry. In the absence of new amendments to the Inheritance Tax legislation, it will not receive such reliefs automatically, so each case will need to be judged on its merits. Or putting it another way, ‘it depends…’
The eligibility for BPR, on the other hand may be more fruitful provided that the level of activities and income are sufficient to constitute a trade (even if the trade is not that of farming).
The other response, of course, is that the Treasury should amend the IHT legislation by statutory instrument so that one branch of government is not giving small incentives to encourage an approach which will ultimately result in another branch of government inflicting heavy penalties.*The views expressed are the author's and not ICAEW's.