There was some cautiously welcomed news in the Chancellor's 2023 Spring Budget for those in the agricultural sector with the announcement of a wide ranging consultation on tax in the context of rural land.

In the wake of Brexit, Government schemes introduced as successors to the removal of EU subsidies have shifted the focus away from agricultural activities towards environmental land stewardship. However, tax in the rural economy, particularly Agricultural Property Relief (APR) under the inheritance tax (IHT) regime, has not evolved to reflect this change of emphasis. This leaves the rural sector operating in tax and subsidy frameworks with little clarity and conflicting incentives.

The consultation is broadly in two parts, the first calling for evidence on the tax treatment of environmental land management and ecosystem service markets. Part 2 then focuses on APR as a whole, with an ancillary section to consult on whether the Government should implement the Rock Review's recommendation that APR be restricted to farm tenancies with a life span of at least eight years.

A New Rural Landscape - The Government's Agricultural Policy Shift

Post-Brexit support for farmers and landowners is moving away from the Basic Payment Scheme to Environmental Land Management Schemes (ELMS): 'public money for public goods'. There are three tiers of ELMS:

  1. Sustainable Farming Incentive (SFI) will pay farmers to adopt sustainable farming practices.
  2. Countryside Stewardship (CS) will pay for targeted environmental work, like restoring wildlife habitats.
  3. Landscape Recovery (LR) will fund longer-term, large-scale projects (over 500 to 5,000 hectares), such as improving water quality across a river catchment area.

As well as direct Government support, landowners are being encouraged to access private sector funding through 'ecosystem service markets', including:

  • Woodland carbon units, which pay for carbon sequestration.
  • Biodiversity Net Gain (BNG): from November 2023 (or April 2024 for small sites), every planning permission will be required to generate at least 10% BNG. While the preference will be for BNG to be delivered onsite, it will also be possible to deliver offsite. Landowners will be able to sell BNG units to developers to meet the condition.
  • Nutrient Neutrality (NN): to date, Natural England has advised seventy-four local planning authorities that protected habitats within their areas are in unfavourable condition due to excess nutrients and that development should only go ahead where it will not cause additional pollution to those sites. Mitigation measures for nutrient pollution can be delivered onsite (such as wastewater treatment facilities) or offsite (such as the creation or restoration of natural wetlands). Landowners can deliver offsite
    mitigation and then sell NN credits to developers.

ELMS and ecosystem services will involve moving away from intensive agriculture and (other than SFI), from focusing on food production. Landowners need to understand the implications of this policy shift for their IHT planning.

The Agricultural Property Relief Incentives at Odds with the New Rural Subsidies Schemes

Broadly speaking, APR is available where an IHT 'transfer of value' is attributable to the agricultural value of agricultural property. Agricultural value does not take account of any value the same property may have by virtue of other aspects, such as being a site with potential for building development. The relief may apply to lifetime transfers (broadly to trustees on trust or on a gift made by someone within seven years of death), transfers on death or when agricultural property is held on trust under the IHT 'relevant property regime' (which can result in a charge being levied on property transferred out of a trust or on every 10-year anniversary).

APR can apply at 50% or 100%, largely depending on who farms the land and the nature of any tenancies in place over it. To qualify for the relief, there are two main parts that have to apply, one of which relates to ownership and occupation requirements. The other, which is where the problems lie in the context of the incentives under the new environmental schemes, is that the property has to be 'agricultural property', which is (broadly speaking) land occupied for the purposes of agriculture, together with cottages, buildings and farmhouses which are of a character appropriate to that property.

The tension lies within this definition of agricultural property, specifically the need for it to be 'occupied for agricultural purposes' to qualify for the relief – which does not, on the face of it, include land used for, or to take advantage of, the environmental schemes described above.

Questions that we are regularly asked by clients include, "If I graze my sheep over a wildflower meadow a few times a year, is this enough for the land to qualify for APR?" "Will I lose APR if I rewild my land and stop farming?" Of course, the availability of APR is always fact-specific, but at the moment, the legislation raises more questions than it answers.

The problem is exemplified in upland regions of the UK where vast areas have seen a significant increase in value thanks to natural capital potential. As things stand, this uplift in value is unlikely to be covered by APR as it does not fall within the current definition of 'agricultural value'. The consultation acknowledges this and asks how environmental land should be valued.

Clarity on the Horizon?

Tax and subsidies are key to the way the rural economy functions and the way land is managed. So long as conflicts exist within these frameworks, the rural sector will be in limbo. Forsters will be contributing to the consultation, which closes for feedback on 9 June 2023, in the hope that its outcome will lead to meaningful clarification of the Government's agricultural policy. Aligning the tax and subsidy incentives is key to restoring the rural sector's confidence in a robust, sustainable and thriving future.

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