APR vs. BPR: Which Tax Relief Applies to Your Farm?

Introduction

Inheritance Tax (IHT) is a significant concern for farmers looking to pass down their land and business to the next generation. With farmland often representing a family’s primary asset, the impact of a 40% IHT charge can be substantial, potentially forcing the sale of land or assets to cover tax liabilities. However, the UK tax system offers reliefs specifically designed to help farming families protect their estates from excessive taxation.

Two key reliefs—Agricultural Property Relief (APR) and Business Property Relief (BPR)—can significantly reduce or even eliminate IHT on qualifying farm assets. APR applies to farmland and agricultural buildings used for farming, while BPR can cover certain farming businesses and diversified income streams. Understanding the differences between these reliefs is essential for effective estate planning.

However, not all farm assets automatically qualify. HMRC applies strict rules regarding land use, ownership, and business activity. Farms that have diversified beyond traditional agriculture—such as those with holiday lets, farm shops, or renewable energy projects—may find that some of their assets fall outside APR, making BPR a more relevant option. In some cases, farms can benefit from both reliefs, but careful structuring is required to ensure eligibility.

This article will break down APR and BPR, explaining what qualifies, the key differences between the two, and how farmers can determine which relief (or combination) applies to their estate. It will also highlight common pitfalls and strategies to maximise tax efficiency, helping farming families safeguard their legacy for future generations.

What is Agricultural Property Relief (APR)?

Agricultural Property Relief (APR) is a key tax relief designed to help farmers pass down their land and agricultural assets without facing significant Inheritance Tax (IHT) liabilities. Without APR, farmland and related property could be subject to a 40% IHT charge upon transfer, making succession planning difficult for farming families. APR reduces or eliminates this tax burden, ensuring that working farms can continue across generations. The recent 2024 Autumn Budget has put a cap on the total APR & BPR that an individuals estate can claim at £1m, or £2m for a couple. Everything over this amount now only receives 50% relief, which is 20% IHT.

What Qualifies for APR?

To claim APR, assets must be classified as agricultural property and used for farming. Qualifying assets include:

1. Agricultural Land – Farmland actively used for growing crops or grazing livestock qualifies for APR. This includes land used for traditional farming, but not land used primarily for commercial, non-agricultural purposes.

2. Farm Buildings and Cottages – Buildings and residential properties tied directly to farming activities, such as barns, storage sheds, and worker cottages, may qualify, provided they are necessary for running the farm.

3. Farmhouses – A farmhouse may qualify if it meets HMRC’s ‘character-appropriate’ test, meaning it must be proportionate in size and function to the land it serves. Large, stately homes with minimal farming activity may not qualify.

Relief Rates – 100% vs. 50% APR

The level of APR depends on the ownership and use of the land:

1. 100% APR – Applies if the land is owned and actively farmed by the deceased, or if it is let on a tenancy starting after 1 September 1995. (Up to the new £1m cap per estate.)

2. 50% APR – Applies if the land is let on a tenancy that began before 1 September 1995 and the owner had no control over the farming activities. (Plus, as previously stated everything over the new £1m cap per estate.)

Common APR Pitfalls

Farmers must meet strict criteria to qualify for APR. Common mistakes include:

1. Hobby Farming – Land must be used for genuine, commercial agriculture. Small-scale or part-time farming without business intent may not qualify.

2. Unused or Let Land – If land is rented out but not used for agriculture, it may not receive full relief.

3. Farmhouse Misclassification – Large homes without active farming use may fail the ‘character-appropriate’ test and lose APR eligibility.

What is Business Property Relief (BPR)?

Business Property Relief (BPR) is a key tax relief designed to reduce or eliminate Inheritance Tax (IHT) on qualifying business assets. For farmers, BPR can be especially valuable when Agricultural Property Relief (APR) does not apply—such as when the farm has diversified into non-agricultural activities like retail, tourism, or renewable energy. By ensuring that farming businesses remain operational across generations, BPR helps prevent forced sales of assets to cover IHT liabilities.

What Qualifies for BPR?

Unlike APR, which applies strictly to agricultural land and buildings, BPR is available for assets involved in trading businesses, including many farm enterprises. Qualifying assets include:

1. Farm Businesses – A farm operated as a trading business (rather than just land ownership) may qualify for BPR. This includes income-generating farming activities such as crop production, livestock farming, or dairy operations.

2. Land and Assets Used in a Trading Business – If land, machinery, or buildings are actively used for the farm business, they may qualify for BPR even if they do not meet APR conditions.

3. Diversified Farm Activities – Some diversified income streams qualify, provided they involve active trading.

Relief Rates – 100% vs. 50% BPR

The level of BPR depends on the ownership and nature of the business:

100% BPR – Available for trading businesses where the deceased owned at least 50% of the business or held controlling shares. (APR & BPR combined now have a £1m cap per estate, which was introduced in the 2024 Autumn Budget.)

50% BPR – Applies to certain assets, such as land, buildings, or shares in businesses where the deceased held a smaller stake. (Plus, as previously stated, everything over the new £1m cap.)

Common BPR Pitfalls

Securing BPR requires careful planning, as not all farm-related assets qualify. Common pitfalls include:

1. Passive Investment Income – BPR only applies to trading businesses, not investment activities. Farms that generate significant income from letting land or buildings (e.g., leasing barns for storage) may be considered investment businesses rather than trading businesses, disqualifying them from BPR.

2. Excessive Letting – While some diversified activities qualify, excessive rental income from non-agricultural assets (such as long-term residential lets) may lead HMRC to classify the farm as an investment rather than a trading business.

3. Insufficient Business Activity – If a diversified venture is run passively rather than as an active business, it may not qualify for BPR. For example, holiday lets must be actively managed (e.g., providing services like cleaning and maintenance) to qualify.

To maximise BPR, farmers should structure their business carefully, ensuring that any diversified activities are actively managed and meet the necessary trading requirements. The next section will explore the key differences between APR and BPR, helping farmers determine which relief applies to their estate.

Key Differences Between APR and BPR

Agricultural Property Relief (APR) and Business Property Relief (BPR) are both designed to reduce Inheritance Tax (IHT) liabilities on farming estates, but they apply to different types of assets. Understanding the key differences between APR and BPR reliefs is crucial for farmers looking to maximise tax efficiency and ensure their land and business can be passed on without unnecessary tax burdens.

Primary Use Cases: APR Covers Agricultural Assets, BPR Covers Farm Businesses

The fundamental difference between APR and BPR lies in what they apply to:

• APR is specifically for agricultural land and property that is actively used for farming purposes. This includes farmland, farm buildings, and qualifying farmhouses.

• BPR is designed for businesses and their assets, meaning it applies to farm businesses and certain diversified ventures that involve active trading.

While APR focuses on land and structures used in agriculture, BPR is broader, covering trading businesses that may extend beyond traditional farming activities.

Overlap Situations: Some Farm Assets Qualify for Both APR and BPR

There are cases where farm assets may be eligible for both APR and BPR, which can provide additional tax relief:

• A working farm that qualifies for APR may also receive BPR if it operates as a trading business.

• Certain farm buildings and equipment used in both agriculture and other business activities may qualify under both reliefs.

If agricultural land does not meet APR criteria (e.g., because it is let out under an older tenancy agreement), it may still qualify for BPR if it is part of a trading business.

APR Applies to Land, BPR Applies to Business Ownership

A key distinction is that APR applies to land and buildings used in agriculture, whereas BPR applies to business ownership and shares in a trading business.

Diversified Farms: How Non-Farming Activities Affect APR and BPR Eligibility

Diversification is a major factor in determining which relief applies:

• APR is strictly limited to agricultural use. If land or buildings are used for non-agricultural activities (e.g., a farm shop, café, or holiday lets), they may lose APR eligibility.

• BPR may apply to diversified farm businesses. If a farm has income-generating activities beyond traditional agriculture—such as food processing, tourism, or renewable energy projects—these assets may still qualify for BPR, provided they form part of a trading business.

However, if a farm generates significant passive rental income (e.g., leasing land for commercial storage or long-term property letting), it may be classified as an investment business rather than a trading business, making it ineligible for BPR.

When to Apply for APR, BPR, or Both

Determining whether Agricultural Property Relief (APR), Business Property Relief (BPR), or a combination of both applies depends on the structure and activities of a farm. While traditional farms often qualify for APR, those with diversified income streams may need to rely on BPR. Understanding which relief applies ensures that farmers maximise tax efficiency and reduce their Inheritance Tax (IHT) liability.

Pure Agricultural Farms – APR Typically Applies

For farms focused solely on traditional agriculture, APR will usually cover the majority of assets, including:

• Farmland used for growing crops or grazing livestock.

• Agricultural buildings, such as barns and storage facilities.

• Farmhouses that meet the ‘character-appropriate’ test.

If the farm is actively used for agricultural purposes and meets APR conditions, BPR is generally unnecessary unless the business structure includes assets outside of APR’s scope.

Farms with Diversification – BPR May Be More Relevant

Farms that have diversified into non-agricultural businesses may find that APR does not apply to all assets. Instead, BPR may be the better option for activities such as:

• Running a farm shop selling processed goods rather than raw produce.

• Operating a holiday let business or wedding venue on the farm.

• Leasing farm buildings for commercial use.

Since these activities go beyond agriculture, they are unlikely to qualify for APR. However, if they form part of an actively managed trading business, BPR may still provide relief from IHT.

Mixed-Use Farms – Some Assets May Qualify for Both Reliefs

Many modern farms have both agricultural and non-agricultural activities. In these cases, different reliefs may apply to different assets:

• Farmland and agricultural buildings could qualify for APR.

• Business assets related to diversification (e.g., a farm café or renewable energy project) may be covered by BPR.

Some assets may qualify for both APR and BPR, offering maximum tax relief.

Example Scenarios

Common Misconceptions and Pitfalls

When claiming Agricultural Property Relief (APR) or Business Property Relief (BPR), many farmers assume their land and assets will automatically qualify. However, HMRC applies strict criteria, and failure to meet them can result in significant Inheritance Tax (IHT) liabilities. Below are some of the most common misconceptions and pitfalls that can lead to denied relief claims.

1. Assuming All Farmland Qualifies for APR

Many farmers believe that simply owning farmland means it will qualify for APR. However, land must be actively used for agricultural purposes at the time of death or transfer. Common disqualifiers include:

Unused or abandoned land – If farmland is no longer actively farmed, it may not be eligible.

Land used for non-agricultural purposes – If a portion of the farm is used for a commercial venture (e.g., storage, events), it may fall outside APR’s scope.

Short-term letting for non-farming use – Renting land for non-agricultural activities, such as equestrian centres or industrial storage, can jeopardise APR eligibility.

2. Believing Rental Income Automatically Qualifies for BPR

BPR is designed for trading businesses, not passive investments. Many farmers assume that rental income from farm buildings or land will qualify for BPR, but this is not always the case. Key pitfalls include:

• Long-term residential lets – If farm cottages are let out without services (e.g., cleaning, maintenance, catering), they are considered passive investments and do not qualify for BPR.

• Commercial property letting – If farm buildings or land are leased for non-agricultural business purposes, they are typically treated as investments rather than trading assets.

• Leasing land for renewable energy – Renting farmland for solar panels or wind farms may disqualify land from APR and may not meet the trading business test for BPR.

To qualify for BPR, the farm must be actively engaged in trade, not just collecting rent from assets.

3. Failing to Document Active Business Use

Both APR and BPR require clear evidence of ongoing use. Without proper documentation, HMRC may reject a claim. Common mistakes include:

• Lack of financial records – Incomplete or missing accounts proving active trading can lead to failed BPR claims.

• Insufficient evidence of farming activity – If APR is claimed, HMRC may ask for proof that land and buildings were used for agricultural purposes.

• Not maintaining up-to-date tenancy agreements – Older tenancies may only qualify for 50% APR, while newer agreements (post-1995) can qualify for 100%.

4. Misclassifying Farmhouses – Why Some Fail to Qualify for APR

A farmhouse is only eligible for APR if it meets the ‘character-appropriate’ test, meaning it must be proportionate to the size and function of the farm. Issues that lead to disqualification include:

• Large country houses with minimal farming activity – If the house is too large compared to the farm or is primarily a residence rather than a working farmhouse, APR may be denied.

• Owner not actively engaged in farming – If the deceased was not actively involved in running the farm, HMRC may argue the house was a residence rather than an essential farm asset.

• Significant non-agricultural use – If the farmhouse is used primarily for non-farming purposes, such as holiday lets or events, it may not qualify.

How to Maximise Tax Efficiency with APR and BPR

Agricultural Property Relief (APR) and Business Property Relief (BPR) offer significant opportunities to reduce or eliminate Inheritance Tax (IHT) on farmland and farming businesses. However, securing these reliefs requires careful planning, as HMRC applies strict criteria. By structuring farm assets correctly, maintaining detailed records, and seeking professional advice, farmers can ensure their estate qualifies for the maximum relief available.

1. Structuring Farm Assets to Qualify for the Most Relief

The way a farm is structured can determine whether it qualifies for APR, BPR, or both. Key considerations include:

• Ensuring agricultural assets meet APR criteria – Farmland, buildings, and farmhouses must be used for genuine agricultural purposes. Non-agricultural assets (such as diversified business ventures) may need restructuring to qualify for BPR.

• Balancing trading vs. investment activities – BPR applies only to trading businesses, not passive investments. Farms with rental income from non-agricultural activities (e.g., holiday lets, commercial storage) should ensure they meet trading thresholds to qualify for BPR.

• Maintaining control over the farm business – If land is let out, the type of tenancy matters. Land leased under pre-1995 agreements may only qualify for 50% APR, whereas newer tenancies or owner-occupied farms may qualify for 100% APR.

Separating investment and trading assets – If parts of the farm do not qualify for APR, structuring them separately as a trading entity can help secure BPR on the business portion.

2. The Importance of Succession Planning and Legal Structuring

Effective succession planning ensures that reliefs are preserved when farm ownership is transferred. Considerations include:

Transferring assets strategically – APR and BPR are most effective when applied to an operational farming business. Gifting farmland or business assets too soon, or without the right structure, could cause a loss of relief.

Using trusts to protect farm assets – Trusts can be an effective way to pass on farm property while maintaining tax efficiency. However, they must be structured carefully to ensure that APR and BPR remain available.

Keeping farming activities central to ownership – If a successor does not actively farm the land, the estate may lose APR eligibility. In family-run farms, keeping heirs involved in farm operations can help maintain relief.

Avoiding fragmentation of the estate – Splitting farm assets between multiple owners (such as through inheritance) can complicate APR and BPR claims. A structured estate plan ensures continuity and tax efficiency.

Instead use a Family Investment Company (FIC) to hold shares in trading companies – An FIC can utilise APR & BPR and then gift over the new £1m cap per estate, or £2m for couples. Freeze your estate at the current values and you pass on any future growth to the next generation without IHT or the trust entry charge of 20%. Then strategically gift the freezer shares to lower your estate below the new £1m cap without losing control of the FIC and the assets it holds. The FIC allows you to split up the capital rights into different trust without splitting up the farm and other businesses.

3. Keeping Detailed Records to Prove Eligibility for APR and BPR

HMRC closely scrutinises APR and BPR claims, so having thorough documentation is essential. Farmers should:

• Keep financial records proving active farming – Ensure that the farm has clear income statements, invoices, and accounts demonstrating active agricultural trade.

• Maintain up-to-date tenancy agreements – If land is rented out, agreements should clearly state agricultural use. Pre-1995 tenancies may need renegotiation to secure 100% APR.

• Document diversified activities properly – Farms with retail, tourism, or renewable energy ventures should maintain records demonstrating that these activities are actively managed as a business (to qualify for BPR).

• Provide evidence for farmhouse eligibility – For APR claims on a farmhouse, records should show that the property is character-appropriate for the farm and that the deceased was actively involved in farm management.

4. Working with Tax Professionals to Assess Relief Options

Given the complexity of APR and BPR rules, seeking expert guidance is crucial. A tax specialist can help by:

• Assessing the farm’s eligibility – Reviewing the estate’s structure to determine whether APR, BPR, or both apply.

• Advising on restructuring strategies – Helping farmers adjust ownership structures to optimise tax relief.

• Ensuring compliance with HMRC requirements – Preventing costly mistakes that could lead to relief being denied.

• Preparing for potential IHT audits – Helping maintain proper records and documentation to defend claims if HMRC investigates.

Look into creating a Family Investment Company to open up multiple inheritance and estate planning strategies and techniques.