RURAL VIEW This column last reviewed the taxation implications of rural opportunities like biodiversity net gain in February 2023, highlighting the tax traps for the unwary. Has much changed? The government initiated a consultation in its March 2023 Budget, hoping to respond last autumn. The response was deferred until this year’s Spring Budget.
Agricultural property relief
The big news is about agricultural property relief. Landowners were very concerned that land may lose its agricultural status for relief from inheritance tax if environmental uses gradually replace agricultural production.
The government has addressed this concern directly by extending the scope of APR. It will now cover land under certain environmental agreements. But we will need to be careful about the full extent of this. The new relief will not be available until 6 April 2025. This will allow the government another year to develop the details of the extended relief; meanwhile, do not enter an environmental agreement and die within the next year or so. We are told that the “policy design will include the following main features” (implication – there may be other features as well):
- Extended APR will be available for lifetime transfers and transfers on death.
- Extended APR will apply to land managed under an environmental agreement with, or on behalf of, the UK government, devolved administrations, public bodies, local authorities and approved responsible bodies. We do not yet know who the “approved responsible bodies” will be, although any organisation on the Defra list of organisations authorised to enter conservation covenants (under the Environment Act 2021) seems an obvious starting point. In practice this may still limit the ability of landowners to make innovative agreements with organisations not on the list (perhaps including overseas investors).
- An environmental land management agreement must be in place on or after 6 March 2024. This can include a pre-existing agreement if it was still effective on 6 March 2024.
- Relief will still apply where an agreement has ended after 6 March 2024 if the land is still managed in a way which would comply with the agreement.
- The land must have been agricultural land for at least two years before its use changed to environmental purposes. Confusingly, the government announcement says that there will not be a need to show the land was used for agricultural purposes and would have qualified for APR before its use changed, before going on to say that HM Revenue and Customs will provide guidance on the evidence that will be needed in due course.
- There is a minimum holding period before APR becomes available: two years for occupied land and seven years for tenanted land in broad terms. The clock will not be reset by a change of use under an environmental agreement.
- Land will be valued for the relief on the special assumption that it is restricted to its existing use. This has never been much of a problem for agricultural land (although farmhouses have caused problems) but it remains to be seen what effect longer-term environmental agreements have on the market value and “agricultural/environmental” value of land for tax purposes. In practice, this may mean that inheritance tax will still need to be paid on any difference between market value and restricted value. Many landowners in occupation cover this difference with business property relief. This may not be so straightforward where management of the land and occupation could be in the hands of others.
- APR currently extends to buildings, cottages and farmhouses which are occupied with land qualifying for APR, provided their occupation is ancillary to the land, and they are of “character appropriate” to the land. The onus is on claimants to prove that buildings and houses satisfy the rules. There will be no change in these provisions as they affect environmental agreements. But the practical challenge here will be to establish that the use of a farmhouse, say, is ancillary to the occupation of land for environmental purposes and is of character appropriate to that use. This has caused problems for farmhouses, both as to their appropriateness and their agricultural value. Environmental agreements are not likely to be any easier.
Business property relief
Of equal though less obvious importance is the mention of business property relief in the response. Unlike APR, there are no plans to change the scope of BPR, but there is a very welcome recognition that land registered and managed in accordance with the Woodland and Peatland Carbon Codes has all the characteristics of a non-investment business and should, therefore, be eligible for BPR. This also covers the value of the carbon units themselves, whether as pending issuance units or confirmed carbon units. Given the problems faced with BPR in recent years by furnished holiday lettings – generally they no longer qualify – the government’s statement is a welcome relief.
Is that it? All problems solved?
Far from it. There remain important questions over income tax, capital gains tax, value added tax, stamp duty land tax and commercial rates. The Treasury and HMRC are to establish a joint working group with industry representatives to study these areas over the next year, “to identify solutions that provide clarity on the taxation of ecosystem service markets where existing law or guidance may not provide sufficient clarity”.
Looking ahead then, we should have much to anticipate in spring 2025: further guidance on the extended APR and more clarification on all the other taxes. Just don’t die before 6 April!
An afterword
I think my first Rural View was published in what was Estates Gazette on 1 June 2013. The series was the brainchild of Sarah Jackman, who has been my editor at EG ever since. Sarah is moving on to pastures new. She has been everything a writer could wish for in an editor: freedom to suggest topics, and gentle and wise use of her prerogative as editor. Thank you, Sarah, and best wishes for the future.
Charles Cowap is a rural practice chartered surveyor and chartered environmentalist
