Agricultural & Business Property Relief for Farmers: When and How It Applies

Introduction

Farmland owners often face significant Inheritance Tax (IHT) liabilities when passing their farms down to the next generation. With farmland, machinery, and business assets often representing the bulk of an estate’s value, a 40% IHT charge could force the sale of essential farm assets just to cover tax bills. However, Agricultural & Business Property Relief (APR & BPR) offers a valuable tax relief that can significantly reduce or even eliminate IHT on qualifying farm assets, ensuring family farms can continue operating without financial strain.

APR & BPR was introduced to prevent the forced sale of family-run businesses by offering relief on qualifying business assets. If a farming business meets the eligibility criteria, APR or BPR can provide 100% on the first £1m of a working farm then 50% over that new limit or 50% relief on the value of assets, reducing the overall IHT burden. This means that farm businesses passed down through generations may not have to pay any IHT at all, provided the right conditions are met.

Why APR & BPR Matters for Farmers

Many farms are more than just land—they are operating businesses that generate income through livestock, crops, and other agricultural activities. APR recognises this by allowing qualifying farming businesses to be passed on free from IHT up to £1m, ensuring continuity of operations. However, not all farm assets automatically qualify, and there are strict rules governing eligibility.

To help farmers understand when and how APR & BPR applies, this article will cover:

• The definition and purpose of APR & BPR and the tax benefits it provides.

• Which types of farm businesses and assets qualify for APR and which for BPR and what conditions must be met.

• When APR or BPR does not apply, including common pitfalls that could result in assets being taxed.

• The interaction between APR & BPR and how they can be used together.

• Steps farmers can take to maximise their eligibility for APR & BPR, including structuring their business correctly and seeking professional tax advice.

What Is Agricultural & Business Property Relief?

Agricultural & Business Property Relief (BPR) are a combination of tax reliefs designed to reduce or eliminate Inheritance Tax (IHT) on qualifying agricultural or business assets. It was introduced to ensure that family-run businesses, including farms, can be passed down to the next generation without the financial burden of a large tax bill.

Under normal circumstances, IHT is charged at 40% on estates valued above the nil-rate band (currently £325,000). However, if a farm qualifies for APR or BPR, up to 100% of the business’s value can be exempt from IHT on the first £1m then 50% over that amount (£2m for couples), significantly reducing or even eliminating the tax owed. Before the 2024 Autumn Budget the 100% IHT relief didn’t have a £1m limit per individuals. This limit has meant that family farms and businesses potentially have an IHT issue where as before they didn’t.

The Purpose of APR & BPR for Farmers

APR & BPR when first introduced existed to prevent family businesses from being broken up due to high IHT charges. Farming is asset-rich but often cash-poor, meaning that without relief, heirs might have to sell off land, livestock, or equipment just to cover IHT liabilities. By offering relief on qualifying business assets, APR & BPR helped ensure continuity of farm operations after inheritance.

For example:

• If a farmer passes down an active farming business worth £2 million and it qualifies for 100% BPR, no IHT will be due on that part of the estate.

• If only some assets qualify for 50% BPR, the taxable portion would still benefit from a reduced IHT burden.

The Tax Benefits of APR & BPR for Agricultural Businesses

APR & BPR offers two levels of relief, depending on the type of business asset:

1. 100% relief* – Applies to most trading businesses, including active farms and shares in unlisted farming companies. *Up to the new £1m cap per individual and £2m per couple

2. 50% relief – Applies to certain business assets, such as land, buildings, or machinery owned personally but used in a qualifying farm business and now everything over the new limits on 100% relief.

The key tax benefits of APR & BPR include:

1. Significant IHT savings – APR & BPR can reduce IHT liability to zero on qualifying assets up to the new £1m limit.

2. Protection of farm continuity – Prevents forced sales of small farmland, machinery, or livestock due to tax bills.

3. Relief for diversified farms – Some non-agricultural business activities (e.g., farm shops, processing, renewable energy) may still qualify for BPR.

However, not all farm assets automatically qualify, and HMRC applies strict rules. Farmers must ensure their business meets the necessary conditions to claim BPR successfully.

Types of Farm Businesses That Qualify for APR & BPR

To qualify for APR & BPR, the farm must be an actively trading business, meaning it must be engaged in farming operations rather than simply owning land or property. Eligible farming businesses typically include:

1. Traditional working farms – Farms producing crops, raising livestock, or engaged in dairy farming.

2. Diversified farm businesses – Activities like food processing (e.g., cheese-making), farm shops, or renewable energy projects may qualify, provided they are actively managed as a trading business.

3. Farms held within a business structure – If the farm is part of a partnership or a family-run company, shares in the business may qualify for APR or BPR.

4. Farms that primarily generate passive income - such as from renting out land or buildings, may not qualify, as HMRC considers these to be investment businesses rather than trading businesses.

The Two Main Levels of BPR: 100% vs. 50% Relief

The amount of APR & BPR a farm business can claim depends on the type of ownership and use of the assets.

1. 100% APR & BPR – Full Exemption from IHT (now only the first £1m each)

Farms can receive 100% relief from Inheritance Tax if they meet the following criteria:

• The deceased owned the business for at least two years before death.

• The farm is an actively trading business, not just an investment.

• Shares in an unlisted farming company or an interest in a partnership qualify.

2. 50% BPR – Partial Relief from IHT (now farm worth over £1m each as well)

Some farm assets may only qualify for 50% BPR, typically when they are owned personally but used within a trading business. This applies to:

• Land, buildings, or machinery owned by the deceased but used by a farming partnership or company they controlled.

• Minority holdings (less than 50%) in farming companies that do not give full control of the business.

Key Conditions Farms Must Meet to Be Eligible

To qualify for APR or BPR, farm businesses must satisfy HMRC’s trading test, which requires:

• More than 50% of the farm’s activities to be trading rather than investment-based (i.e., actively farming rather than renting out land).
  The deceased to have owned and run the business for at least two years.
  The business to be a going concern at the time of death (not in liquidation or dormant).

• Farms that fail the trading test—such as those primarily earning income from land rental, holiday lets, or commercial property leasing—may not qualify for APR or BPR.

What Assets Qualify for APR or BPR?

Not all farm assets automatically qualify for Agricultural or Business Property Relief (APR or BPR). HMRC distinguishes between trading assets, which are eligible, and investment assets, which are not. To qualify, assets must be actively used in a trading farm business, rather than held for passive income or investment purposes.

Below is a breakdown of the key farm assets that can qualify for 100% or 50% BPR, helping reduce or eliminate Inheritance Tax (IHT).

1. Land, Buildings, and Farming Equipment

Farmland – Land used for crop production, grazing, or other agricultural activities generally qualifies for 100% APR, provided it is part of an actively trading farm business. If the land is let out, it may still qualify for 50% APR (depending on the type of tenancy and business structure).

Farm buildings – Structures used in farming operations, such as barns, milking parlours, and grain stores, qualify for APR or BPR if they are part of a trading business. However, if farm buildings are rented out for non-agricultural use, such as for commercial storage or holiday lets, they may be classified as investment assets and lose both APR & BPR eligibility.

Farm equipment and machinery – Tractors, combines, irrigation systems, and other essential farming equipment qualify for APR, as they are integral to the business. Assets that are leased out separately or not used in farming operations may not qualify.

2. Livestock and Stored Produce

Livestock – Animals raised for sale, dairy production, or breeding qualify for APR as they form part of the active farm business. However, if a farm holds livestock purely as an investment (e.g., high-value pedigree animals primarily for resale), those animals may be subject to Capital Gains Tax (CGT) instead.

Stored crops and produce – Harvested but unsold crops qualify for APR if they are intended for sale as part of the farm business. However, if produce is stored for long-term appreciation (e.g., aged wine or timber held for investment purposes), it may not be eligible.

3. Shares in Farming Partnerships and Agricultural Businesses

Shares in an unlisted farming company – If a farm operates as a family-run limited company, the first £1m worth of shares in that company can qualify for 100% APR or BPR, provided the company is actively trading and meets the ownership requirements.

Farming partnerships – A farmer’s interest in a partnership that runs an active farm business also qualifies for 100% APR up to the new £1m cap. However, personally owned land used by the partnership may only qualify for 50% APR, unless it is fully integrated into the business.

Agricultural co-operatives – If a farmer holds shares in a farming co-operative, the eligibility for APR depends on whether the business is considered an active trading entity.

When APR or BPR Does Not Apply

While Agricultural or Business Property Relief (APR or BPR) can significantly reduce or eliminate Inheritance Tax (IHT) on qualifying farm assets, it does not apply in every situation. Certain farming activities or business structures may disqualify assets from receiving relief, particularly when assets are considered investments rather than part of a trading business.

Situations Where Farm Assets Are Considered Investments

APR & BPR is designed to support trading businesses, not passive investments. If a farm or its assets are primarily used for investment purposes, they may not qualify. Common situations where APR or BPR is denied include:

1. Letting out farmland – If farmland is rented out rather than actively farmed by the owner, HMRC may classify it as an investment asset, making it ineligible for APR or BPR.

2. Non-farming commercial property – Farm buildings converted into office spaces, warehouses, or other commercial properties for rental income will typically be viewed as investments rather than business assets.

3. Long-term property lets – Residential properties on a farm that are leased out long-term (such as cottages rented to tenants) are generally considered investment assets, meaning they do not qualify for APR or BPR.

4. Land held for speculative development – If farmland is held primarily with the intention of selling it for development rather than using it in a trading business, it will not qualify for relief unless a separate trading business is created to trade in the land and build out the properties with the intention to sell for a profit.

How Letting Out Farmland or Diversifying Can Affect Eligibility

Many farms diversify their income by leasing out land or engaging in non-agricultural activities. While this can improve financial stability, it may also impact APR & BPR eligibility.

1. Letting Out Farmland

Letting land to third-party farmers or businesses is one of the most common reasons APR & BPR is denied. However, there are exceptions:

If the land is let to a partnership in which the landowner is actively involved, it may still qualify for 50% BPR rather than being treated purely as an investment.

If the land is rented under certain tenancy agreements, Agricultural Property Relief (APR) may still apply, even if BPR does not.

2. Diversified Farm Businesses

Many farms expand beyond traditional agriculture into alternative revenue streams, such as farm shops, holiday cottages, or renewable energy projects. The impact on APR & BPR eligibility depends on whether the farm/business is actively managed:

1. Holiday lets and glamping sites – If farm buildings or land are used for short-term lets with additional services (such as cleaning, catering, or guided experiences), they may qualify for BPR instead of APR. However, if they are purely rental properties with minimal owner involvement, they will likely be classified as investments.

2. Farm shops and processing businesses – If a farm shop sells its own produce or processes farm products (such as a dairy producing cheese), it is typically considered part of the farming business and eligible for APR. However, if the shop primarily sells third-party goods, it may be seen as a separate retail business and assessed differently to instead be eligible for BPR.

3. Renewable energy projects – Income from solar panels, wind turbines, or biomass production may qualify for BPR if the energy is used mainly for the farm’s own operations. However, if the land is leased to an energy company, it is likely to be treated as an investment.

Interaction with Agricultural Property Relief (APR)

Farmers seeking to reduce Inheritance Tax (IHT) liabilities often rely on both Business Property Relief (BPR) and Agricultural Property Relief (APR). While these reliefs serve different purposes, they can sometimes be used together to ensure that farm assets qualify for the highest level of tax relief. Understanding their differences and how they overlap is essential for effective estate planning.

Differences and Similarities Between BPR and APR

Both APR and BPR offer relief from IHT, but they apply to different types of assets:

• APR applies to agricultural property, including farmland, farm buildings, and certain farmhouses. It only applies if the land is actively used for agriculture at the time of transfer.

• BPR applies to business assets, covering farming businesses as well as some non-agricultural commercial activities conducted on a farm.

• APR provides relief only for agricultural value, meaning any development potential or non-farming use may still be taxed. BPR, on the other hand, can cover the full market value of a qualifying business asset.

• APR can apply to rented land, but only under certain tenancy agreements. BPR generally requires the farm owner to be actively running the business.

How Farmers Can Use Both Reliefs for Maximum Tax Efficiency

In some cases, the same farm asset may qualify for both APR and BPR, which can provide a safety net if one relief is not available:

1. Farmland used for agriculture – Qualifies for APR, but if it also forms part of an active farming business, it may qualify for BPR as well. If APR is denied (for example, because the land was not actively farmed before transfer), BPR may still apply.

2. Farmhouses – If a farmhouse fails APR’s strict "character-appropriate" test, it may still qualify for BPR if it is part of an active farming business.

3. Diversified farms – If parts of the farm are used for non-agricultural activities, such as a farm shop or renewable energy business, those areas may not qualify for APR but could still receive BPR if they form part of a trading business.

4. Proper estate planning ensures that farm assets are structured in a way that maximises relief under both APR and BPR, reducing or eliminating IHT liabilities.

Planning Ahead: How to Maximise BPR

Maximising Business Property Relief (BPR) requires careful planning to ensure that farm assets meet HMRC’s criteria for tax relief. By structuring the farm correctly, maintaining active business operations, and seeking professional advice, farmers can reduce or eliminate Inheritance Tax (IHT) liabilities on qualifying assets.

Steps Farmers Can Take to Ensure Assets Qualify

To qualify for APR & BPR, a farm must operate as an active trading business, not just as an investment holding. Key steps to ensure eligibility include:

1. Maintaining Active Business Operations – The farm must be actively involved in crop production, livestock farming, or other agricultural activities. A farm that primarily generates rental income may be classified as an investment business, making it ineligible for APR or BPR.

2. Avoiding Excessive Passive Income – Farms with diversified activities, such as renting out land or buildings, should ensure that at least 50% of their total activities are trading rather than investment-based.

3. Managing Diversification Carefully – If a farm has non-agricultural activities, such as holiday lets or a farm shop, it is essential to demonstrate that these are actively managed businesses rather than passive investments. Providing additional services, such as catering or guided farm experiences, can strengthen a claim for BPR.

4. Keeping Accurate Records – Maintaining clear financial records and business documentation can help demonstrate active farm management in the event of an HMRC audit. This includes business accounts, tenancy agreements, and evidence of farming activities.

Importance of Structuring Farm Ownership Correctly

How a farm is owned and operated plays a critical role in determining APR or BPR eligibility. Ownership should be structured to ensure assets qualify for the maximum level of relief.

1. Using Partnerships and Companies – Farms operated as partnerships or family-owned companies often have a better chance of qualifying for APR or BPR, as the business structure supports active trading status. Shares in unlisted farming companies typically qualify for 100% APR or BPR up to the new £1m cap.

2. Separating Investment and Trading Activities – If a farm has investment-based activities, such as commercial property rentals, it may be beneficial to separate these into a different legal entity. This ensures that the main farm business remains eligible for APR or BPR. The investment based activities could be gifted via trust to the next generation early to prevent them being part of your estate and prevent you losing APR or BPR eligibility.

3. Reviewing Land and Building Ownership – Land owned personally but used by a farming company or partnership may only qualify for 50 percent BPR. In some cases, transferring ownership of land into the business can help secure 100 percent relief.

Seeking Professional Tax Advice for Long-Term Estate Planning

Tax laws surrounding APR & BPR are complex, and eligibility depends on how farm assets are structured and managed. Seeking professional advice from a tax specialist or agricultural accountant can help farmers:

• Assess whether their farm qualifies for APR or BPR and identify potential risks that could disqualify assets.

• Plan asset transfers strategically to ensure the next generation benefits from full IHT relief.

• Avoid common mistakes, such as assuming all farmland automatically qualifies or failing to meet the trading activity test.

• Prepare for potential HMRC scrutiny, ensuring all documentation is in place to support a APR & BPR claim.