Advice for farmers as HMRC steps up APR claim investigations

HMRC has stepped up investigations into claims for agricultural property relief (APR), with a 28% jump in the number being scrutinised.

In the 12 months to the year ending 31 March 2022, HMRC opened investigations into 278 claims, according to private wealth law firm Boodle Hatfield – up from 217.

Tax specialist Zoe Chandler, of rural accountants Old Mill, says one reason could be the scaling back of investigations in the past two years during the Covid-19  pandemic.

See also: Tax and money management tips for diversified farm businesses

“We have noted in general a lot more activity around APR and other tax reliefs as HMRC operations get back to normal levels after the pandemic,” she says.

Agricultural land can be passed on by owners to their children or others without incurring inheritance tax (IHT) by claiming APR.

To qualify, the land must be used for agricultural purposes, such as growing crops or rearing livestock, for  two years (if occupied by the owner) or seven years, before it is passed on.

Kyra Motley, of Boodle Hatfield, says HMRC will investigate claims when it suspects land is not being farmed commercially.

Investigations are triggered by a number of reasons, from farmworkers’ cottages being used as holiday lets to question marks about the occupation of a farmhouse.

Ms Chandler advises on some of the common reasons, and how farmers can remain APR compliant.

Occupation of the farmhouse

If the claimant lives in the farmhouse, but is not involved in farming the land, the farmhouse will not qualify.

While the farmland may still be eligible, the farmhouse will be liable for IHT.

“If there is a disconnect between the occupation of the farmhouse and the farming of the land, the house will not qualify for APR,” she says.

To qualify, she recommends that when a share-farming or other form of joint venture is undertaken, the farmer should retain control of decision-making, for instance on the cropping schedule or livestock breeding.

“These decisions should be evidenced,” Ms Chandler advises.

“For example, if you are having a meeting with the contract farmer, make sure that there are minutes of this meeting so that you can demonstrate to HMRC that you play an active part in the farming operations.”

If the farmhouse is large but the acreage is small, APR is unlikely to be granted.

“When there is a manor house and 50 acres, HMRC will take a dim view of an APR claim,” she says.

Use of farmworker accommodation as a holiday let

A farm cottage must be occupied by a farmworker who actually works on the farm or a retired farm worker or their dependants to be eligible for APR.

When it is used as holiday accommodation, APR does not apply and, in most instances, neither does business property relief (BPR), because HMRC views this as an investment activity.

“To qualify for BPR, you have to prove that you are actively involved in the running of the furnished holiday letting business and not remote and detached from your guests, as might be the case in an Airbnb situation where there is simply a key safe and guests let themselves in,” says Ms Chandler.

“A very high level of additional activity is needed – for instance, the provision of evening meals, breakfast hampers, organising activities during a stay or providing an informal transport service for guests – to show you are providing an experience; a holiday service.”

Land use by a third-party for rewilding projects

Land that is put into a government-run environmental scheme will be eligible for APR, but not if a third party plants trees or rewilds the land outside of the available schemes, according to Ms Chandler.

Countryside Stewardship and habitat schemes, such as species-rich grassland, water fringe and coastal belt, are among those that preserve the APR status.

APR remains available where woodland is considered ancillary to the farm – for instance, for use as a shelter belt – and does not cover a large area when compared with the overall area of agricultural land.

“Rewilding is a relatively new term, but I am sure we will see more test cases for APR on these in the coming years,” she says.

Use of farm buildings

In order for farm buildings to qualify for APR, they must be in use for agriculture and not left empty or derelict.

A building that is let for some other commercial use will also not qualify for APR.

If farm buildings are too remote from the farm there could be a question mark over whether these are being used for agricultural purposes.

“Farmers should ensure that buildings are being put to use for storage of equipment or crops wherever possible and consider whether redundant buildings can be repurposed before considering constructing a new building,” says Ms Chandler.