The Budget Statement in October 2024 announced some far-reaching changes to the availability of Agricultural and Business Property Reliefs.
Agricultural Property Relief (APR) and Business Property Relief (BPR) were restricted to full relief on the first £1,000,000 of value held only, and an effective Inheritance Tax (IHT) rate of 20% on the value exceeding that amount.
Since October many tenant farmers have commented that at least their tenancies will be exempted from these new rules, with tenancies and the associated values remaining outside the realms of IHT.
While there is some truth to that statement, as always, it’s not quite as straightforward – and the exemption from the IHT rules is by no means universal.
The basis for the argument sits within Section 177 of the Inheritance Tax Act 1984 and as such is based on a pre-budget part of the IHT legislation.
It is important to note that while we have not yet seen the full proposed draft legislation on the new IHT rules, we cannot confirm with any level of certainty that Section 177 will remain unaffected by the new rules.
But for now at least, let’s proceed on the basis that it will remain in force as it currently stands and that the reliefs or exemptions provided will remain fully available.
Section 177 contains rules relating to Scottish agricultural leases only, and covers both 1991 Act tenancies, being tenancies which are usually held by virtue of tacit relocation and which run from year to year, and fixed term tenancies.
The latter would mainly be Limited Duration Tenancies (LTD) or Modern Limited Duration Tenancies (MLDT).
In relation to 1991 Act tenancies the legislation provides for the value of the deceased’s estate in so far as attributable to the deceased tenant’s interest in the lease to be left out of account.
As a result, the value of the tenancy interest would not be counted for Inheritance Tax purposes. The value of the lease would still require to be confirmed as part of the estate administration but would be returned at NIL value to HMRC.
While this is good news for Inheritance Tax, in a world where we see an increase in assignations of tenancies during lifetime for value through the relinquishment provisions or otherwise, such a return at NIL value may have the effect of increasing the potential capitals gains tax liability on a future sale or transfer of the tenancy interest.
There are a number of conditions attached to the application of the NIL value return.
First of all, the lease interest must have been held by virtue of tacit relation (continuation year upon year). Secondly, on the death of the tenant, the tenancy interest must pass to a new tenant and thirdly, the deceased must have held the tenancy interest for a continuous period of at least two years prior to their death, or become tenant by way of succession.
In most scenarios, those first two conditions will be easily satisfied. The third condition however merits some further consideration.
Under the third condition, we require the deceased tenant to have held the tenancy for a minimum of two years or have taken on the tenancy on the death of the preceding tenant.
As a result, if the current deceased tenant took on the tenancy under a lifetime assignation or by way of an assignation on the open market under the relinquishment provisions less than two years prior to death, it would appear that such a tenant will not qualify for the NIL value return.
It is important to be aware of this and when discussing lifetime assignations with clients this will become a key consideration.
Despite the conditions attached, it would appear that tenants under 1991 Act tenancies will be able to have the benefit of the tenancy value being excluded from their estate for Inheritance Tax. In light of the substantial values attached to some tenancy interests, that is definitely something worth having.
However, this does not mean that such tenant farmers will not have to consider the application of the new IHT rules at all. Section 177 specifically states it only applies to the value of the tenancy interest itself and excludes the value of any rights of the tenant to compensation in respect of the tenant’s improvements.
Many have entered into Amnesty Agreements in relation to tenant’s improvements and where extensive or high value improvements were carried out by the tenant, the value of these on the death of the tenant will remain subject to IHT.
In addition, all other farming assets held by the tenant farmer such as livestock and machinery will also fall within the new IHT regime.
Under the new rules only the first £1,000,000 of farming assets will be exempt from IHT so it’s easy to see how between tenant’s improvements, livestock and machinery and any other farmland held in ownership, the new rules still need to be considered and appropriate succession planning advice sought.
In relation to fixed duration tenancies such as LDT’s or MLDT’s the rules contained in Section 177 are different.
Here the legislation states that in assessing the value of any interest of the deceased tenant in the remaining term of the lease, the value associated with any prospect of renewal of the lease by tacit relocation will be excluded from the value of the deceased’s estate.
Essentially that means that the possibility that the lease may be extended in the future, for example because relevant notices to terminate were not served and the lease is allowed to roll on, must be ignored when valuing these fixed term tenancies.
The suggestion is of course that the value of the tenancy as it stands and the remaining term will be part of the estate subject to IHT.
There is a strong argument to state that the value of such a tenancy is however negligible on the basis that full rent is being paid under the lease. However, that may change if the LDT or MLDT was granted on favourable terms, for example on the basis of rent much below open market rent.
In such a scenario HMRC could argue that there is indeed a value in that fixed term tenancy and such value would become subject to IHT.
As always when it comes to IHT, every case will need to be considered on its own merits but it would appear that there is at least some additional relief available to tenant farmers in relation to their tenancy interests.
In the past the farming community has benefited from substantive IHT reliefs which has often resulted in a lack of succession planning.
Now that the cushion of full relief has been removed, it is more important than ever to take relevant specialist advice that can allow steps to be taken where possible to reduce tax liabilities and secure the future of the farming enterprise.
If you have any questions please get in touch with our rural succession planning team.