Due to the rise in estates that include a business or land/pasture used to rear animals, it is more important than ever to understand the reliefs available that may help reduce an Inheritance Tax (IHT) bill. In this blog, we explain the basics of Business Relief and Agricultural Relief, by explaining what they are, what can be claimed upon death, the process of claiming, and how you can best advise your clients.
What is Business Relief?
Introduced by the UK government in 1976, Business Relief, formally known as Business Property Relief (BPR), is a relief that can reduce the value of a business or its assets when working out how much Inheritance Tax must be paid on an estate. It is important to remember that any ownership of a business, or share of a business, is included in the estate for Inheritance Tax purposes.
Business Relief is given to ensure that following the death of a business owner, a family-owned business can survive as a trading entity without having to be sold or broken up to pay an Inheritance Tax liability. However, it is also available to private investors who invest in qualifying businesses. Usually, any business assets need to have been held for a minimum of two years before death to qualify for Business Relief.
How much Business Relief can be claimed upon the death of a client?
You can get 100% Business Relief on:
- a business or interest in a business
- shares in an unlisted company
You can get 50% Business Relief on:
- shares which control more than 50% of the voting rights in a listed company
- land, buildings, or machinery owned by the Deceased and used in a business they controlled or were a partner in
- buildings, land or machinery used in a business and held in a Trust that it has the right to benefit from
Business Relief cannot be claimed if the company:
- is a not-for-profit organisation
- primarily deals with securities, stocks or shares, land or buildings, or in making or holding investments
- is being sold, unless the sale is to a company that will carry on the business and the estate will be paid mainly in shares of the company
- is being wound up, unless this is part of a process to allow the business to continue
Business Relief cannot be claimed on an asset if it:
- qualifies for Agricultural Relief (However, if full Agricultural Relief is not available, you can look at claiming Business Relief on the remainder)
- wasn’t used mainly for business in the two years before it was either passed on as a gift or as part of the Will
- is not needed for future use in the business
How is Business Relief claimed?
When Inheritance Tax is due, the Executor or Administrator must complete form IHT400 (Inheritance Tax account). If the estate includes qualifying business assets, form IHT413 (Inheritance Tax: business and partnership interests and assets) must also be completed to claim Business Relief. These two forms are then submitted to HM Revenue & Customs (HMRC) as part of the estate valuation.
What is Agricultural Relief?
Agricultural Relief is a relief from Inheritance Tax granted by the Inheritance Tax Act 1984. According to GOV.UK, “agricultural property which qualifies for Agricultural Relief is land or pasture that is used to grow crops or to rear animals intensively”. Additionally, it includes:
- growing crops
- stud farms for breeding and rearing horses and grazing
- trees that are planted and harvested at least every 10 years (short-rotation coppice)
- land not presently being farmed due to a crop rotation scheme
- properties such as farm buildings, farm cottages and farmhouses
- the value of milk quota associated with the land
- some agricultural shares and securities
A property may be owner-occupied or let, but it must be part of a working farm in the UK, Channel Islands, Isle of Man or European Economic Area. Additionally, the property must have been owned and occupied for agricultural purposes immediately before its transfer for:
- two years if occupied by the owner, a company controlled by them, or their spouse or civil partner
- seven years if occupied by someone else
The value of any farm as of the date of death needs to be robust. Therefore, a full agricultural valuation will need to be completed by a specialist. This is expensive, however, it is usually the only way that HMRC will agree to any reliefs.
How much Agricultural Relief can be claimed upon the death of a client?
Agricultural Relief is due at 100% if:
- the land was farmed by the person who owned it
- a short-term grazing license was in place to allow the land to be used by someone else
- the land was let on a tenancy that began on or after 1 September 1995
A property that was owned before 10 March 1981 can qualify for 100% relief, as long as a couple of other criteria are met. If any of the above are not satisfied, relief may still be available, but at a reduced rate of 50%.
Any outstanding mortgages or any other secured liabilities must be deducted first before calculating the Agricultural Relief.
Claiming Agricultural Relief on farmhouses and cottages:
- buildings must be of a nature and size appropriate to the farming activity that is taking place
- the property is valued as if it could only be used for agricultural purposes
- any value over and above this ‘agricultural value’ does not qualify for relief
Agricultural Relief cannot be claimed on:
- farm equipment and machinery
- harvested crops
- derelict buildings
- property subject to a binding contract for sale
As mentioned previously, Business Relief cannot be claimed on the value of an asset that already qualifies for Agricultural Relief. However, a farming business may find that Business Relief is available on the value of an asset not fully covered by Agricultural Relief (if the conditions are met).
How is Agricultural Relief claimed?
Similarly, to Business Relief, the Executor or Administrator must complete form IHT400 (Inheritance Tax account) when Inheritance Tax is due. They will then be required to submit form IHT414 (Agricultural Relief) when deducting Agricultural Relief on form IHT400. Agricultural Relief can then be deducted from some or all the land, property, or shareholdings in farming companies, included in the Deceased’s estate. Separate forms are asked for each agricultural holding and a plan showing the location and extent of the holding are required.
How can you help your clients with this process?
From our experience, clients often believe that claims for Business Relief and/or Agricultural Relief are automatic, however, this is not the case. Due to this common misconception, we encourage partners to have conversations with their clients regarding the importance of clear record-keeping of events (For example, if your client owns a farm and has sold or rented a field). Not only will HMRC want a valuation as at the date of death, but they will also likely want a value at the time the land was sold to understand if it was a sale at market value or sold at under value, which would then be a gift for the difference.
This may appear to be an obvious reminder; however, it is crucial to reiterate its importance as HMRC will want to know all these details at the point of death. This responsibility will ultimately fall to the Executor or Administrator to provide this evidence; therefore, all records should be kept in a safe and easily accessible location for when the time arrives.
Additionally, we recommend advising your clients that many items (in particular, land) can be gifted during a lifetime and then sold. These may qualify for relief; however, a trail of the transactions will need to be identified to confirm eligibility.