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HMRC internal manual

Shares and Assets Valuation Manual

IHT Agricultural Property Relief: Replacement Provisions (Agricultural Property)

These provisions relax the occupation and ownership conditions in s.123(1)(a) where the agricultural property owned by the company at the time of the transfer has replaced other agricultural property - ss118 and 119(1).

  • the two year occupation condition in s.123(1)(a)(i) is treated as satisfied if the two (or more) properties concerned were occupied by the company for the purposes of agriculture for an aggregate period of at least two years out of the five years immediately before the transfer


  • the seven year ownership test in s.123(1)(a)(ii) is treated as satisfied if the two (or more) properties were both owned by the company and occupied (by itself or another) for the purposes of agriculture for an aggregate period of at least seven years out of the ten years immediately before the transfer.

The relief available under ss.(1) and (2) of s.118 should not exceed what it would have been had the replacement(s) not been made - s.118(3). The purpose of s.118(3) is to prevent a company which has qualified for relief from increasing the amount of relief available, by purchasing a much more expensive property shortly before a death or the making of a transfer. It is an anti-avoidance provision.

Our approach to s.118(3) should be practical. You should adopt a reasonable approach aimed at quantifying and agreeing the restricted relief in a practical way. If there is any indication that the company’s resources were being rearranged into considerably more extensive agricultural property to obtain increased relief on the death/transfer, the case should be referred to the Litigation and Technical Advice Team (LTAT). The approach to be adopted is illustrated by the following example.


Company A owns and farms Blackacre and has done so for a number of years.

October 2005 - Company A sells Blackacre for £600,000 and buys Whiteacre for £800,000 to increase the scope of its farming operations. Both transactions are at arm’s length. Both prices are wholly attributable to agricultural value.

April 2007 - The owner of all the shares in A dies. Whiteacre then has an agricultural value of £1,000,000. The two year occupation condition in s.118(1) is satisfied.

A practical way to give effect to s.118(3) in such circumstances is to adopt the following apportionment:

Agricultural value of Blackacre at time of sale (on the facts, the sale price) divided by the agricultural value of Whiteacre at the time of the purchase (on the facts, the purchase price) x the agricultural value of Whiteacre at the date of death.

or in figures 600,000 divided by 800,000 multiplied by £1,000,000 = £750,000

The result of this approach is that on the death the AR on Whiteacre is limited to £750,000. The excess of £250,000 does not qualify for AR.

Costs of sale and of purchase should be disregarded.

It is considered that the apportionment approach set out above is a practical and equitable way of giving effect to s.118(3). However s.118(3) does not expressly provide for such an apportionment. If in any case its application is questioned you should ask the agents for their views on how the subsection operates on the facts of the particular case. You should then refer those views to LTAT for consideration.

Under s.118(4) changes resulting from the formation, alteration or dissolution of a partnership are to be disregarded for the purposes of s.118(3).

For further information see Chapter 24 of the Inheritance Tax manual at IHTM24110 onwards.

  Additional Guidance: SVM150000