The Tax Treatment of Land: A Spring Update

Both UK and national devolved administrations are undertaking the biggest agricultural policy change for a generation to respond to our climate and biodiversity crises, whilst retaining sustainable food production. This is leading to significant potential for changing land use to incorporate long term environmental schemes delivering public goods and, also, the emergence of ecosystem service markets. 

These changes in land use have potential to deliver new sources of income for farmers and have thrown up questions around land use and its tax treatment, particularly with reference to Agricultural Property Relief (APR) and Business Property Relief (BPR). 

At the Budget last year, the government published a call for evidence to explore the tax treatment of both, and in March 2024 HMRC published their findings and consultation response alongside the Spring Budget.   

Changes To Agricultural Property Relief 

HMRC has altered the scope of APR to include land used for Environmental agreements, including AECS and other future schemes. This matters because it allows for the retention of APR on agricultural land that is entered into not just short or medium term, but also longer-term environmental agreements.  

When does this happen?  

This applies UK wide, and comes into effect for all transfers from 6th April 2025, meaning that all land participating in environmental schemes will be eligible for APR and exempt from inheritance tax.

How does land become eligible?  

Land must have been under agricultural production or usage for at least two years immediately prior to that land undergoing entry into an environmental scheme. APR will be available where there is an agreement in place for the scheme on or after 6th March 2024. This includes an agreement entered into before 6th March 2024 if it remains in place on or after that date. HMRC will provide guidance on the necessary evidence in due course, but this is not expected to be too onerous as, in some cases, a considerable amount of time may have passed before it is required.  

Furthermore, the relief will continue to be available where an agreement has finished. On the conclusion of an agreement it may be possible to return the land to agricultural use, but if this is not the case, it will still be eligible if the land continues to be managed in a way that is ‘consistent with that original agreement’.  

What about buildings associated with that land?  

Buildings, including farmhouses, that are used in connection with the environmental land, will also qualify for APR where ‘that building is occupied with, and that occupation is ancillary to, the environmental land’. As currently, they must be of a ‘character appropriate to the environmental land’ to qualify for the relief. 

How does this impact tenants? 

The changes will allow for landowners and managers to work collaboratively on environmental schemes that support government policy goals for nature restoration. It also demonstrates a direction of travel that HMRC will follow the shifting patterns in land use that are currently underway in the UK in response to policy change.  

It will remove a barrier to Tenant farmers entering environmental schemes by removing the risk that the Tenants’ participation will endanger Landlord’s eligibility for APR over that land. This announcement removes the ‘APR barrier’ for landowners entering longer-term agri-environmental schemes. 

No Planned Changes To Business Property Relief (BPR) 

There is no planned change to BPR currently. The consultation response confirms that land registered and validated under Woodland and Peatland Carbon Codes qualifies for Business Property relief in principle.  It is clear upon reading the consultation that ecosystem services markets are considered to be at an emergent stage, and as such present a challenge in a range of areas. The outcome is that HMRC has established a working group to continue with this work.