Budget 2023 - Rural IHT

There are well publicised changes to personal taxation due from the start of the new tax year in April, many of them are Stealth Taxes which will have a greater impact as inflation combines with reductions and extended freezes of available allowances, as my colleague Ian Bond considered in his comments on yesterday's budget here. There were also announcements yesterday made to taxes which impact businesses as Kate Featherstone comments here.

There is also potential change to Inheritance Tax (IHT) on the horizon for Rural Landowners as Irwin Mitchell planning expert Nicola Gooch has highlighted in her insight on the Budget 2023 here.

In addition to the restriction of the geographical scope of Agricultural Relief (APR) and Woodlands Relief to property in the UK from 6 April 2024, there is also to be a consultation on how other taxes impact on rural business.

There are two key (different but connected) questions to be considered in the "Taxation of environmental land management and ecosystem service markets” consultation which runs until 9 June, namely:

• a call for evidence on the tax treatment of the production and sale of ecosystem service units. The aim is to understand the commercial operations and the areas of uncertainty in respect of taxation; and

• a consultation about the scope of agricultural property relief from inheritance tax. The aim is to explore the extent to which the current scope of agricultural property relief may represent a barrier and, if necessary, potential updates to the scope of the existing land habitat provisions in the relief.

The second question is of particular interest to individuals who are considering succession planning for their agricultural business and are wanting to ensure that they can pass their Rural Business to their family as a going concern, without having to sell assets to meet an IHT liability.

APR is available (subject to meeting the ownership and occupation conditions) on land and assets which are in use for the purpose of agriculture. There is no formal definition of 'agriculture' in IHT legislation, but the HMRC's IHT Manual refers to several statutory definitions which are 'inclusive and not exhaustive' and indicates that 'other purposes not listed may still constitute agricultural use'.

Business Relief (BPR) may be available to further relieve rural businesses with assets that are not used for the purpose of agriculture, or where the agricultural value is less than the market value accepted by HMRC for IHT purposes. This is only possible if the business is wholly or mainly trading (rather than being mainly occupied with investment activity). Land and assets used in the business but not actively involved in the trade side, time spent in the management of these assets, and the income and profit derived from them, will be factors that HMRC consider when deciding whether a business is wholly or mainly trading. Changing land use could therefore also impact on the availability of BPR.

While HMRC is relatively clear in its guidance that they will not interpret statutory definitions of agriculture in a strict sense for the purposes of APR, it is still not clear whether land used in ecological mitigation schemes will be able to benefit from APR and or whether they will constitute investment activity for BPR purposes. This uncertainty creates a barrier for farmers wishing to change the use of land currently used for agricultural purposes and enter into schemes as the government currently wishes to encourage.