This article explains how Business Property Relief and Agricultural Property Relief operate in relation to Inheritance Tax planning and also highlights some of the recent cases on this topical subject.
If, upon transferring assets (whether this be upon the death of the transferor or by a transfer into a discretionary trust), the transferor was domiciled in the UK, Inheritance Tax (IHT) is payable on the value of the estate if the value exceeds the “nil rate band” (currently fixed at £325,000 until the 2020/21 tax year)). There are, however, a number of reliefs that may be claimed against IHT to reduce or remove any IHT that would otherwise be due. Two of the most important reliefs are Business Property Relief (BPR) and Agricultural Property Relief (APR).
BPR is a relief available providing certain conditions are met in respect of length of ownership and the type of asset that it is at the date of disposal. In order to obtain BRP the property must have been owned for the period of at least 2 years prior to the transfer. Relief is then given at either 50% or 100% depending upon the type of asset it is.
Owning a business or a share in a business or partnership may qualify for 100% relief. Land or buildings, machinery or plant used by a business, which was a company that the transferor had control of or was a partnership of which the transferor was a partner, will attract relief at 50%.
BPR case law
However, the relief available on machinery or plant was under discussion in the recent case of Trustees of Nelson Dance Family Settlement v HMRC . The accepted view prior to this case was that BPR was only available on the transfer of a business and not on the transfer of individual assets. However, the High Court in this case confirmed that BPR was available on the transfer of individual business assets. This could therefore mark a change in approach and if followed in future cases could mean that business assets could be transferred into trust for example without having to pay an initial 20% IHT charge.
The decision as to whether BPR is available or not is made by HMRC at the date of the transfer i.e. when the asset is either sold or gifted. The potential problem with this is that whilst BPR may currently be available, it may not be in the future if legislation changes. Therefore, it is worth considering the options that are available now to capture BPR. It is possible to use a trust in this situation. By transferring the asset into a trust it attracts BPR at the time of the transfer if the relief available and there is no need to wait until years down the line to establish whether relief would be given.
APR is available on the transfer of agricultural property in the UK, Channel Islands, Isle of Man or the EU providing various conditions are satisfied. The property must be agricultural property, which includes woodland and buildings used for rearing livestock, agricultural land and cottages, farmland and farmhouses occupied with the agricultural land.
The agricultural property must have been continuously occupied as agricultural property for at least 2 years by the landowner for agricultural purposes. Alternatively, if the landowner has not used the land for agricultural purposes then he must have owned the land for at least 7 years and it must have been occupied by someone who has used the land for agricultural purposes during that period.
Relief is available at 100% where the transferor occupied the property with ‘vacant possession’ or where he/she had rented the property out on or after 1 September 1995 and it is available at 50% where the property was let before 1 September 1995.
There has been a great deal of case law on what amounts to a farmhouse in respect of APR.
APR case law
In Antrobus (1)  HMRC concluded that the property involved was a farmhouse. Subsequently principles were set out for deciding whether the property which was classed as a farmhouse was “of a character appropriate”.
The house’s size, content and layout were considered and whether it was proportionate to the requirements of the farming activities.
In Antrobus (2)  the agricultural value of the property was in consideration. There was a limited construction of what constituted a farmhouse. It was suggested that so-called lifestyle farmers could not qualify as “farmers” if they did not farm the land on a day-to-day basis.
Following on from Antrobus (2) came McKenna (ex'ors) v IRC  (known as McKenna), which will have an adverse effect for IHT purposes for anyone other than genuine “hands-on” working farmers. As the McKenna case was heard as a Special Commissioners Hearing, it does not have legal precedence. However, unless the decision is appealed, which will then provide the necessary legal precedence on which the best advice can be based; we will have to rely on its interpretation of the IHT legislation.
In the McKenna case, the house failed to qualify as a farmhouse because the owners had a contract farming arrangement and the day-to-day management of the farming was the sole responsibility of the contractor and an agent on behalf of the owners.
The cases highlighted in this article show that whilst BPR and ARP are extremely valuable reliefs to be used in IHT planning, careful planning is required. In recent times, the availability of both BPR and APR has been under great scrutiny as the above cases demonstrate and one would imagine that there will be more case law to follow.