As environmental concerns continue to grow, many farmers across England and Wales are turning to environmental stewardship schemes to enhance the sustainability of their agricultural practices. While these schemes offer numerous ecological and financial benefits, they can also introduce complexities in inheritance tax planning, particularly concerning Agricultural Property Relief (APR).
At Blackstone Solicitors, we understand that navigating these overlapping areas can be challenging. This article aims to provide a clear overview of how environmental stewardship schemes might affect your eligibility for APR and what steps you can take to mitigate any risks while maximising your tax relief.
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What Is Agricultural Property Relief (APR)?
APR is a valuable inheritance tax (IHT) relief designed to encourage the preservation of agricultural businesses. It reduces or eliminates the IHT liability on qualifying agricultural property, which can include:
- Farmland and pasture used for agricultural purposes
- Farmhouses, cottages, and buildings integral to the operation of the farm
- Woodland and certain ancillary buildings
To qualify, the property must have been used for agricultural purposes for at least two years if occupied by the owner, or seven years if let to another party. APR applies only to the agricultural value of the property, which excludes any additional value arising from non-agricultural uses or development potential.
What Are Environmental Stewardship Schemes?
Environmental stewardship schemes, such as the Countryside Stewardship Scheme (CSS) and the Environmental Land Management Scheme (ELMS), incentivise farmers to adopt environmentally friendly practices. These schemes may involve:
- Creating wildlife habitats
- Restoring natural features, such as hedgerows or wetlands
- Implementing sustainable farming techniques
- Reducing carbon emissions or promoting biodiversity
Participants typically receive payments for complying with specific environmental measures, which may restrict certain types of farming activities.
How Environmental Stewardship Schemes Affect APR
The interaction between environmental stewardship schemes and APR is complex. While these schemes can enhance the ecological and financial value of a farm, they may also raise questions about whether the land continues to meet APR’s strict eligibility criteria. Below are the key considerations:
- Agricultural Use vs Environmental Use
APR applies only to land used for agricultural purposes, such as growing crops or grazing livestock. If land enrolled in a stewardship scheme ceases to be used for these purposes, it may no longer qualify for APR. For example:
- Land converted into a wetland or wildlife habitat may be viewed as primarily serving environmental rather than agricultural purposes.
- Fields taken out of production to allow for rewilding or carbon sequestration might similarly fall outside the scope of APR.
- Ancillary Uses
In some cases, stewardship activities may be considered ancillary to agriculture, allowing the land to retain its APR eligibility. For example, maintaining hedgerows or field margins as part of a scheme might complement ongoing agricultural use.
- Impact on Farmhouses and Buildings
The eligibility of farmhouses and buildings for APR depends on their connection to the agricultural operation. If the primary use of the surrounding land shifts to environmental stewardship, HMRC may argue that the farmhouse is no longer occupied for agricultural purposes, potentially jeopardising APR on the property.
Case Law and HMRC Guidance
HMRC assesses APR claims on a case-by-case basis, considering the specific facts of each situation. While there is limited case law directly addressing environmental stewardship schemes, past decisions have emphasised the importance of demonstrating an ongoing agricultural purpose. For example:
- Arable Reversion: Land reverted to grassland under an environmental scheme may still qualify for APR if it supports grazing or other agricultural activities.
- Dual Purpose Land: Land that serves both agricultural and environmental functions may retain eligibility, provided agriculture remains the dominant use.
HMRC’s guidance also highlights the need for detailed documentation and evidence to support APR claims, particularly when land use has diversified.
Steps to Protect APR Eligibility
Farmers participating in environmental stewardship schemes can take several proactive measures to safeguard their entitlement to APR:
- Maintain Agricultural Activities
Where possible, integrate stewardship activities with ongoing farming operations. For example, use land enrolled in a scheme for seasonal grazing or rotational cropping to demonstrate continued agricultural use.
- Keep Detailed Records
Document the specific stewardship measures implemented and their relationship to your farming activities. This may include:
- Scheme agreements and payment records
- Maps and photographs of the land’s use
- Livestock grazing schedules or crop rotation plans
Comprehensive records will be invaluable in substantiating your APR claim if challenged by HMRC.
- Separate Non-Agricultural Activities
Consider separating non-agricultural elements of your farm business to preserve APR on the remaining property. For example, land dedicated solely to rewilding or renewable energy projects might be excluded from your APR claim, while the rest of the farm retains eligibility.
- Assess the Impact on Farmhouses and Buildings
Ensure that the agricultural connection between your farmhouse and the surrounding land remains strong. If necessary, adjust occupancy arrangements or demonstrate that the farmhouse continues to serve as the centre of your agricultural operation.
- Seek Professional Advice
The interaction between APR and environmental stewardship schemes is a highly specialised area. Engaging a solicitor with expertise in agricultural property law can help you navigate these complexities and structure your business to maximise tax relief.
Alternative Reliefs: Business Property Relief (BPR)
In some cases, Business Property Relief (BPR) may provide an alternative route for reducing IHT liabilities. BPR applies to trading businesses, including farms with diversified income streams. If parts of your farm no longer qualify for APR due to environmental stewardship, BPR may still offer relief on those assets, provided the overall business meets HMRC’s trading criteria.
Conclusion
Environmental stewardship schemes offer a valuable opportunity to improve the sustainability of your farm and generate additional income. However, they can also complicate inheritance tax planning, particularly in relation to Agricultural Property Relief. By understanding the potential impacts and taking proactive steps to align stewardship activities with APR requirements, you can ensure your farm remains eligible for this vital tax relief.
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Disclaimer: This article provides general information only and does not constitute legal advice on any individual circumstances.
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