Renting Farmland for Grazing – Inheritance Tax Implications

Author: Elin Ludgate (ACA), Senior Agri Pod Leader

I rent my farmland on a short term grazing licence, what is my position in terms of Inheritance Tax?

It’s very important you make the proper tax return disclosures to protect your future agriculture reliefs.  This will depend on whether the activity in question is a ‘trade’ – that is – declaring your rental income as a self-employed farmer, or whether you declare this income within the land and property pages of your tax return. There are significant differences in the tax position of these two options, for both Inheritance Tax and Capital Gains Tax.

In general terms, Inheritance Tax is due on the value of the estate of an individual upon his/her death at the rate of 40% after deducting the Nil Rate Band, which is currently £325,000. 

It’s inevitable that the farm will be sold, gifted or the farmer dies while in ownership of the farm and although this might seem simplistic, the consequences are significant. Agricultural property that qualifies for 100% Agriculture Relief is land or pasture used to grow crops or to rear animals.  The property must be owned and occupied by the farmer for two years or owned and occupied by someone else (e.g. a tenant) for seven years.

However if the farmer is not an ‘active farmer’, then agriculture relief on the farmhouse is usually denied.  HMRC states the following: ‘Where land is let to a third party under a grazing licence or agreement the owner is unlikely to be in occupation for agricultural purposes of that land during the period of the licence.  This may have an impact on whether agricultural relief is available on the farmhouse.’

To qualify for maximum relief, a farmer must be responsible for day-to-day running of the farm, and this should involve activities of a grassland farmer such as spreading fertiliser, reseeding, fencing, hedge-cutting, harrowing, farmyard maintenance or general grassland management.

Also inheritance tax forms completed upon the death of the farmer, request whether or not the deceased received ‘Basic Payment’, and in the event that the farmer did not receive this payment, it weakens the farmer’s claim to 100% Agriculture Property Relief (APR).

Another way of ensuring 100% Agriculture Property Relief is to rent out your farm (including farmhouse) under a Farm Business Tenancy (FBT), which began on or after 1 September 1995, with a right to vacant possession within twelve months.  Under a Farm Business Tenancy the landlord can claim 100% Agriculture Property Relief on the transfer of the farm on his death, provided that he/she has owned the farm for seven years.

It’s imperative that you plan ahead to maximise and safeguard your Agriculture Property Relief and our advice is to speak to an experienced agricultural accountant.

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For help with your farming enterprise finances including advice on inheritance tax and capital gains tax, please don’t hesitate to talk to our team of agricultural accountants. We’ve over 85 years’ experience in helping farmers with their business finances, so you are in safe hands.