The taxing question of environmental gain
A number of reasons may be prompting landowners to consider removing land from agricultural production. There’s an appetite for rewilding and conservation in its own right as well as interest in the income that it can generate. And the possible loss of area-based payments heralded in the Agriculture Bill may mean marginal land is no longer suitable for productive cropping.
However, owners looking for alternative uses need to weigh up the long-term impact of change on inheritance tax liabilities.
In order to qualify for Agricultural Property Relief (APR) from inheritance tax, land has to be occupied for agricultural purposes – occasional farming use doesn’t count.
On the other hand, land will qualify for Business Property Relief (BPR) so long as it is run as a trading business, no matter how small the scale. So if an owner chooses to re-wild arable land, this will still benefit from BPR provided a minimal level of trading activity continues.
It’s important to be aware though that investment businesses do not qualify so it isn’t possible to lease the land to a third party and claim BPR. The only inheritance tax relief available on tenanted land is APR.
Government guidance on APR defines qualifying agricultural property as ‘land or pasture that is used to grow crops or to rear animals intensively.’ Owners who want to let land to tenants to pursue conservation goals need to be careful that the primary usage doesn’t tip over from farming to environmental delivery.
It is unclear whether private ecosystem services agreements, such as those under water management or net environmental gain schemes, would impact on APR qualification.
For tenants, these are likely to have to be similar in character to existing countryside stewardship agreements in not prohibiting agriculture or taking land out of production.
There is nothing to stop owner-occupiers from adopting alternative management systems on their own land, provided trading activity is continued, but environmentally focused buyers of let land will need to take careful advice on whether they can encourage such approaches on tenanted holdings.
The move towards environmental enhancement and protection may be an attractive proposition but, in order to preserve long-term inheritance tax exemptions, landowners must take care to ensure this does not amount to the abandonment of trading and agricultural activity.