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HMRC internal manual

Shares and Assets Valuation Manual

IHT Agricultural Property Relief: Practice Notes / dealing with companies where AR may be an issue

Agricultural Relief (AR) - Practice Notes

These notes are intended to be for the use of Share Valuers.

  1. The Val 70 should indicate whether agricultural relief has been claimed but there is no statutory requirement for a claim to be made before relief can be allowed.
  2. Any question concerning relief or, where appropriate, the amount of the value transferred entitled to relief should be dealt with concurrently with the valuation negotiations - NOT left until they are concluded.
  3. Some aspects of AR need to be referred to the Litigation and Technical Advice Team (LTAT). Before any reference to LTAT is made, via your team leader, you should ensure that a full analysis of the facts has been made and the specific problem(s) identified.
  4. All cases where AR has been claimed should be referred to a risk assessor.
  5. In calculating the part eligible for relief, debts and mortgages which are specifically charged on agricultural property should be deducted from the value of the property. Where the agricultural value of that property is less than its full value, the liability should be apportioned pro rata between the agricultural and non-agricultural values.
  6. Any case where difficulties arise should be referred to LTAT.
  7. Agricultural Tenancies - For a brief history of the law relating to agricultural tenancies and a description of the types existing today and their characteristics see Chapter 24 of the Inheritance Tax manual at IHTM24210 onwards.

Dealing with companies where AR may be an issue

We frequently meet cases where Business Relief (BR) is due but cases where AR may be due are much less common. One reason for this is simply that shares in the vast majority of trading companies will qualify for BR, subject to the required conditions being satisfied, whereas AR will only be an issue if the company owns agricultural property. Another reason is that shares in a company whose only or main business is farming will probably qualify for both AR and BR. According to s.114, AR takes precedence over BR but if it is clear that one relief or the other will apply to the entirety of the value transferred, it may be unnecessary to carry out all the enquiries needed to establish that AR is due.

Usually, therefore, we only have to consider AR where BR is not available for some reason. For example, it may be that the company’s principal activity is to let out land (including agricultural land) so that BR is precluded by s.105(3). However, AR may still be due (at 100% if the land was let on or after 1 September 1995 or at 50% if it is subject to an earlier tenancy) if the relevant conditions are met. Where BR is due, it generally applies to the entire value of the shares being transferred. AR, on the other hand, is only given on the value of the shares in so far as it is attributable to the agricultural value of agricultural property.

AR is a complex relief and is dealt with in considerable detail in Chapter 24 of the Inheritance Tax manual at IHTM24000. There have also been a number of Special Commissioners’ decisions relating to AR. The instructions in this chapter concentrate on the sections of Part V, Chapter II IHTA which deal specifically with companies. Because of the complexity of the relief and (for Shares and Assets Valuation) its comparative rarity, valuers should consult LTAT if they are in any doubt. In turn, because our treatment of AR is constantly refined as a result of judicial decisions, LTAT will consult colleagues in IHT Technical Group and Litigation as necessary.

Things to remember:-

  • AR can only be due if the transferor (trustees in relation to discretionary trusts) has a controlling shareholding in the company immediately before the transfer (see SVM112040).
  • If you are considering the availability of IHT reliefs in respect of a majority shareholding in a company which on the face of it farms its own land, you should examine the accounts critically to ensure that the company is trading and to consider the level of trading. You should also obtain full details of the land and buildings owned by the company and of who occupied any farmhouse/cottages and on what terms. If the farmhouse/cottages are not occupied for agricultural purposes (SVM112060 onwards), they will not qualify for AR. They may still qualify for BR (if they are let properties in a hybrid - mainly trading - business) but you should consider whether, if occupied by the transferor or a connected person, they should be regarded as excepted assets under s.112(6) - see SVM111220.
  • You should take care in considering the ownership and occupation tests (SVM112060 onwards). You need to know precisely what agricultural activities were being carried out on the various parts of the company’s land and by whom. If there was very little activity and especially if the company owned the farmhouse, consult LTAT.
  • Where it is available, the relief applies to the value of the shares in so far as it is attributable to the agricultural value of agricultural property. Agricultural property means “agricultural land or pasture and includes…….such cottages, farm buildings and farmhouses, together with the land occupied with them, as are of a character appropriate to the property.” - s.115(2). If the company owns a large farmhouse but only a small area of land or if most of the land has been let out but the farmhouse (of any size) is in hand, refer to LTAT. LTAT, taking advice as necessary from IHT colleagues and the VOA, will consider such questions as:
    • Is the house a farmhouse at all? [A farmhouse was described in one case which went to the Special Commissioners as a “dwelling for the farmer from which the farm is managed”.]
    • Was the house occupied for the purposes of agriculture for the requisite period? (See SVM112060.)
    • Was the house of a character appropriate to the agricultural land in the estate? If not, it will not qualify as agricultural property. Note that for this test we should take into account all the agricultural property in the transferor’s estate, not just the property farmed by the company - see Chapter 24 of the Inheritance Tax manual at IHTM24033 to IHTM24036.
  • The main situation in which AR is a live issue for SAV is where the company does not qualify for BR (usually because of s.105(3)). Assuming that all the conditions for AR are satisfied, the relief will be due in so far as the share value is attributable to the agricultural value of agricultural property. You will need to ask the DV for his opinion of the agricultural value of the agricultural property and (if different) his opinion of its open market value - see SVM112170. If the land and buildings qualifying for AR are let under tenancies commencing before 1 September 1995, the rate of AR on them will be 50% - see SVM112030. Any land or buildings which were in hand or were let under tenancies commencing on or after 1 September 1995 will qualify for relief at 100%.
  • The following examples illustrate how the relief might apply in practice to shares subject to a charge to IHT. The examples are on the basis of a transfer on death or a lifetime transfer of the transferor’s entire interest.


Example 1

The value of a 60% shareholding in a company which mainly lets out its agricultural land and buildings is agreed at £500,000. The company has gross assets (of all kinds) of £1.3million. The agricultural value of its land and buildings (let out under a pre-September 1995 agricultural tenancy) is agreed at £800,000 and the agricultural value of the land still farmed by the company is agreed at £50,000. AR at 50% will apply to

£800.00 divided by £1,300,000 x £500,000

giving relief of £307,692 × 50% = £153,846

AR will also be due on

£50,000 divided by £1,300,000 x £500,000

in other words on £19,231 at 100%.

The total AR due is thus £173,077, leaving £326,923 as the chargeable value of the holding.

If a debt such as a mortgage is secured on a particular asset, then the value net of that liability is brought into account in the calculations.

Example 2

If in Example 1 there were a mortgage of £150,000 secured on the let agricultural land valued at £800,000, the value qualifying for AR at 50% would be £650,000. The part of the £500,000 share value which qualified for AR at 50% would be

£650,000 divided by £1,150,000 x £500,000 = £282,609, giving relief of £141,305

As can be seen, the denominator in the fraction would also be reduced by £150,000 to £1,150,000. A debt secured on land not qualifying for relief would similarly be deducted from the denominator of the fraction. In calculating the fraction of the share value which qualifies for relief, therefore, deduct any liability secured on the qualifying agricultural property from the numerator and all secured liabilities, on whatever property they are secured, from the denominator.

Example 3

If the facts were as in Example 1 but the Valuation Office Agency (VOA) reports that the let land and buildings had an agreed market value of £1 million as opposed to their agricultural value of £800,000, we would need to divide £800,000 by the value of all the gross assets (including the let land at £1 million, the total is now £1.5 million) and apply this fraction to the value of the holding (which might be agreed at, say, £600,000 as a result of the VOA increase). Thus £320,000 of the £600,000 value would qualify for relief at 50%.

In addition,

£50,000 divided by £1,500,000 x £600,000 = £20,000 would qualify for AR at 100%

This example assumes there are no secured liabilities.

Example 4

A company’s business is mainly that of farming in its own right, so BR is not precluded by s.105 (3). The value of a 55% shareholding is agreed at £750,000. The company owns agricultural property with a market and agricultural value of £1.2 million. It has total gross assets of £1.8 million and there are no secured debts. Amongst the assets is a cottage (value £200,000) which is merely the home of the transferor’s son, who has never worked in the farming business. The value of the shares would qualify for AR at 100% in so far as it is attributable to the agricultural value of the agricultural property in other words on

£1,200,000 divided by £1,800,000 x £750,000

However, equally, BR would be available on the full value of the shares. It appears that only one asset would qualify for neither AR nor BR. The cottage occupied by the son was not occupied for the purposes of agriculture (so no AR) and it was used wholly or mainly for the personal benefit of the son (no BR in view of s.112(6)). Thus

£200,000 divided by £1,800,000 x £750,000 will not qualify for either relief.

If in Example 4, the agricultural property had a market value of £2.8 million as opposed to its agricultural value of £1.2 million (because of amenity or development value), the part of the share value attributable to the additional £1.6 million value would qualify for 100% BR, assuming the normal conditions for relief were satisfied.

  Additional Guidance: SVM150000