Could environmental schemes change your tax status?
The change in subsidy payments is encouraging farms and estates to look at ways they could manage their land for environmental benefit, but could this shift in focus have implications for inheritance tax?
How might the new subsidy scheme affect inheritance tax (IHT) liability?
Poppy Langdon-Down (PLD): Farmers can benefit from generous IHT reliefs, with up to 100 per cent agricultural property relief (APR) on assets used for agricultural purposes and up to 100 per cent business property relief (BPR) on anything used for trading purposes; qualifying for these is a priority for most agricultural landowners. The Agriculture Act 2020 makes post‑Brexit farming subsidies in England dependent on delivering environmental land management schemes (ELMS). There is concern that managing land for environmental benefit under these schemes might remove its agricultural or trading status, and thus its eligibility for APR or BPR. The implications for exposure to IHT are potentially significant, but are not yet clear.
Kirsten Mitchell (KM): The Scottish government is yet to announce its plans for introducing a new subsidy framework. However, Scotland is in a good position to adapt to new environmental priorities. Here, a lot of land is less suited to intensive commercial farming, and upland land is particularly appropriate for environmental management.
Where does the dividing line fall between agricultural use and environmental use?
PLD: Agriculture is not specifically defined in IHT legislation and we rely on guidance from other areas of law, and on Her Majesty’s Revenue and Customs’ (HMRC’s) view, to determine whether land or property is used for agricultural purposes. It remains to be seen whether an ELMS run alongside farming activity (such as hedgerow management or the establishment of wildlife margins) could count as ancillary to farming operations. And an ELMS still requires management – it is different from rewilding, which leaves land to its own devices and thus unequivocally removes it from agricultural use – so it could be argued that an ELMS is agricultural activity. Previously, such integration has worked under the Countryside Stewardship Scheme, or the Agri‑Environment and Climate Change Scheme in Scotland.
Will it be possible to achieve environmental land management and still benefit from IHT reliefs?
PLD: It should be, if managed correctly. The new schemes are for agricultural support, so retaining a substantial agricultural element will be vital. And land managed under ELMS could still count as a trading asset for BPR; for example, some schemes will be within a rotation that is part of the farming business. The risk comes when land is removed from agricultural practices as part of the scheme.
KM: While environmental farming is a new risk to APR and BPR eligibility, land management in Scotland has always been something of a balancing act in terms of these reliefs: there is a history of balancing assets and, for example, managing sporting and mixed‑use estates to ensure that reliefs are available where possible.
So, what should landowners consider when planning for IHT?
KM: When planning for IHT there has always been a play‑off between agricultural and non‑agricultural elements, and trading and investment income, with owners assessing their management practices and income streams against IHT liabilities. For APR qualification, it is essential to ensure that the primary function of the land is active farming. Also, consider the degree of environmental activity: biodiversity off‑setting such as rewilding, at one extreme, is unlikely to constitute active agriculture, but less intensive farming with ancillary environmental schemes probably would. It is important to establish where the parameters lie.
PLD: Understanding your property, being responsive and taking advice on reliefs, values and technicalities are key. Also, consider the impact on the whole, including the amount of true agricultural land remaining to justify the suitability of, say, a farmhouse to the size of the holding and the balance of trading versus investment activities.
What needs to change so landowners know where they stand?
PLD: The current uncertainty needs to be clarified up‑front through statute and policy, not retrospectively through case law. This requires two government organisations – the Treasury and the Environment Agency – to collaborate and provide the clarity landowners need to make informed decisions. Until then, landowners should exercise caution.
KM: HMRC’s Inheritance Tax Manual considers situations such as the set‑aside scheme, whereby land left fallow qualifies as agricultural property if directly managed as part of the scheme. This suggests that unless the purpose of the scheme is to remove land from agriculture (such as under the Forestry Grant Scheme), land managed environmentally should still qualify for APR. Updating the manual to include new environmental schemes would provide clarity.
Written by Poppy Langdon-Down, an RICS Chartered Surveyor with extensive experience in rural estate management who now specialises in valuation and professional services, and Kirsten Mitchell, an RICS Chartered Surveyor who specialises in rural and residential valuation, particularly agricultural property for taxation and loan security purposes and portfolio valuations.
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