What is Agricultural Relief and what is Business Relief?

When someone dies their estate has to be valued for Inheritance Tax (IHT).  It is also necessary to take in to account gifts that the deceased may have made in the last seven years of their life. IHT may be payable at 40%, depending on the net value of the deceased’s assets.  However, if the assets of the estate or lifetime gifts involve agricultural or business assets then they may be eligible for favourable treatment which will reduce the amount of IHT payable due to two different reliefs that can apply.

As you would expect, Agricultural Relief (AR) will apply to qualifying agricultural assets and Business Relief (BR) to qualifying business assets.  Where there is a farming business, and so both types of relief may be able to be applied, AR is applied first.  Even with the restriction of reliefs introduced from 6 April 2026, these reliefs can help save substantial sums of money and may avoid the need for the farm or business to be sold in order to pay the IHT due on it.

How much tax can be saved with AR and BR?

For deaths before 6 April 2026, the relief can reduce the value of the asset by as much as 100% of the value.

For deaths on or after 6 April 2026 there will be a £2.5 million cap on assets which are able to qualify for 100% relief.  This will be a combined cap covering both AR and BR and will be apportioned across the qualifying assets.  Qualifying assets over the £2.5 million allowance will be taxed at 50%.   It is important for those affected to take specialist advice on their options to minimise the impact of the reduction in these reliefs. This article gives a good overview of what to consider.

In relation to AR, most qualifying agricultural assets will generally have the benefit of 100% relief (subject to the cap) unless the deceased was not in possession of the asset or did not have the right to obtain possession within 12 months of the transfer or death.

In the case of BR it depends on the type of business asset as to whether it will be able to attract 50% or 100% relief.

The business or agricultural asset must generally be owned by the deceased for two years to be able to qualify and must not be subject to a binding contract of sale at the time of the deceased’s death.

Does any agricultural asset qualify for relief?

To avoid abuse of the relief, there are strict requirements in order for agricultural assets to qualify for AR.

Agricultural property is agricultural land or pasture used for the rearing of livestock or fish and may also include woodland and buildings provided their occupation is ancillary to that of the agricultural land or pasture.  It is also necessary that the buildings, such as cottages, farm buildings and farmhouses are of a character appropriate to the land.

The market value of, for example a farmhouse, may be higher than the pure agricultural value of the house.  In which case AR only applies to the agricultural value.

What about business assets?

The following types of business assets are able to qualify for relief at either 100% (subject to the capped allowance) or 50%:

1. The business of a sole trader – 100% relief
2. The interest of a partner in a business – 100% relief
3. Unquoted shares in a company regardless of the size of holding – 100% relief
4. Unquoted securities of a company controlled by the deceased/transferor immediately before the death/transfer – 100% relief
5. Quoted shares or securities of a company controlled by the deceased/transferor immediately before the death/transfer – 50% relief
6. Land, buildings, plant or machinery which, immediately before the death/transfer, was used wholly or mainly for the purposes of a business carried on by a company of which the deceased or transferor had control or a partnership in which he was  a partner – 50% relief.

Shares listed on Alternative Investment Market (AIM) were able to attract 100% relief but this is now restricted to 50% relief.

The business must be carried out for gain and must be a trading business so cannot be an investment business, otherwise relief is lost. As referred to above, those assets which would  qualify for 100% relief will now be subject to the £2.5 million cap from 6 April 2026.  The tax relief will be restricted to 50% on the value of assets over the cap.

Anything else?

The rules relating to BR and AR are complicated and so the above is very much an overview.  Therefore, in each instance where IHT may be reduced by the application of BR or AR it is necessary to look at the facts relating to those particular circumstances.

For more information about this topic, please get in touch info@ts-p.co.uk.