Consultation on Agricultural Property Relief and environmental land management

Other than the changes to the pension rules discussed in our other article, and the changes to capital allowances, at first glance the Spring budget may not have appeared to be too exciting for farmers and landowners. However, alongside the budget documents, HMRC published a new consultation called ‘Taxation of environmental land management and ecosystem service markets’ which is likely to be of interest. This looks at the tax treatment of environment schemes and also looks at Inheritance Tax Reliefs.

This consultation recognises that farming is going through a period of change and that the government is changing the way that it works with farmers and the agricultural sector. The government is taking the opportunity of leaving the EU to phase out subsidies for landownership and tenure, and to pay farmers to provide environmental goods and services alongside food production. In England they have already introduced policies covering food production and the environment. We have yet to see how this will look in Scotland, but it expected that environmental aspects will feature highly in the requirement for subsidy payments.

Part 1 of the consultation is a call for evidence on the tax treatment of the production and sale of ecosystem service units such as woodland carbon units. The aim of this being for HMRC to understand the commercial operations and the areas of uncertainty in taxation so these can be addressed.

Part 2 of the consultation looks at Inheritance Tax Reliefs and in particular the scope of Agricultural Property Relief (APR). This is a very valuable relief for landowners, particularly if they are not undertaking the farming activities themselves and the consultation looks at two aspects of the relief.

This covers concerns which have been raised that APR is a barrier to making long-term land use change from agricultural to environmental use. It explores the extent that APR does present a barrier and looks at ways this can be addressed.

The first aspect of Part 2, considers how APR applies to land used for environmental schemes. It provides some clarification on HMRC’s views of how the current rules apply and looks at how they can be reformed. Interestingly it confirms that they want to target the expanded relief so that land which has never been used for agricultural purposes does not qualify for APR, as a result of the changes.

The second aspect of the consultation explores a recommendation made in the Rock Review. The Rock Review was an independent review of tenant farming in England which was published in October 2022. This raised concerns that the tax system does not encourage landlords to grant long term tenancy agreements or encourage tenants to enter long term environmental agreements and it included a recommendation to restrict 100% APR where land is let and the tenant does not have an interest of at least eight years. The reasoning behind this being that it is felt that if landlords grant long term tenancies this will encourage tenants to enter long term environmental agreements. The consultation looks at this specific recommendation and it states that although Scotland, Wales and Northern Ireland are not in the geographical scope of the Rock Review, that 100 per cent APR could be similarly restricted.

 Whilst the first aspect of Part 2 could bring about welcome changes to the legislation which have been anticipated for a while, the second aspect could be less welcome and could potentially have a significant impact on the relief available to landlords. However, if the reforms are made it may suggest that APR for landlords in its revised form has a securer future if it has been reformed to incentivise landowners in line with government policy.

The consultation closed on 9^th June and we will be monitoring how matters progress and the impact any changes made will have. If you would like to consider these matters further or would like to discuss any aspect of Inheritance Tax or the reliefs available, please contact Mairi Drummond.