Is rewilded land eligible for Agricultural Property Relief?

As we move into a world where environmental aspects start to assume a greater importance and “rewilding” moves up the agenda, it is perhaps worth considering whether land which is used wholly or largely for rewilding will still automatically be eligible for Agricultural Property Relief (APR). The answer, as is often the case, is probably “it depends”.

If we start with S115 (2) IHTA 1984, Agricultural property is defined as “agricultural land or pasture…(which) includes woodlands…if the woodland…is occupied with agricultural land or pasture and the occupation is ancillary to that of the agricultural land”. Note that the ancillary condition applies only to woodland. The questions which need to be considered are.

1. Is the rewilded land agricultural land or pasture? It may be so at the outset having previously been used for cropping or livestock but ten years later when it is covered in scrub, the drainage has broken down and it is infested with weeds, it may no langer be capable of agricultural production, at least not without considerable effort and expense. The position is much clearer cut where the land has been deliberately planted up as woodland.
2. Where Biodiversity Net Gain (BNG) land is planted up as woodland, one still needs to be careful of the occupation conditions – the relief will only be given where the woodland is ancillary to the occupation of other qualifying land, so if, for example, the landowner retains the BNG land but lets the land to which it is ancillary, relief will be lost.
3. The fact that land within specific habitat schemes is brought within APR by s124c IHTA implies that the parliamentary draftsmen thought that the existing legislation did not regard habitat land as agricultural and therefore legislated to make it so.  If this is the case, and notwithstanding that the list has not been amended since 1997 it would suggest that land outside the relieved schemes (or at best their successors) will not, in strict law, be covered.

If the land is eligible for APR, what value is relieved? This is covered quite clearly in s116 (1) IHTA where the relief is only given for “the agricultural value of agricultural property”. Agricultural value is defined in s 115 (3IHTA). Effectively whilst at the outset agricultural value may be equivalent to market value, once the land is entered into a BNG commitment the agricultural value will be reduced considerably, both by virtue of the agreement itself and the restrictions which will be placed on agricultural use, and also by the growing cost of restoring the land for farming purposes. Even without any BNG premium, land in a scheme is therefore likely to have an APR shortfall, and certainly APR will never apply to any element of premium

Entitlement to Business Property Relief (BPR) will possibly be easier in some cases:

1. If the BNG operations are such that they can be considered a “business” and it is part of a larger farming enterprise, then the ruling in HMRC -v- Farmer (1999) is likely to be helpful since it will bring the smaller “investment business” within the relief given to the predominant trade.
2. There is an argument (currently untested) that the management of land in this way may still be a trade, but not the trade of farming. The point was raised when BPS first came in and HMRC were presented with the hypothesis that an entrepreneur could acquire land and entitlements, arranging for a third party to fulfil the environmental aspects and then simply claiming the BPS (but not actually farming). At the time the HMRC view was that such an arrangement would constitute a trade, and I believe Peter Lees, who was head of the HMRC farming team, gave that opinion at an ICAEW conference in the early 1990s. Clearly there are some parallels with a BNG arrangement but there is also a distinction in that the BPS arrangement involved the claimant having to incur costs and carry out activities to earn the income. In contrast, the BNG arrangement, might specifically bar the claimant from carrying out work on the land. Given that even the BPS suggestion was never tested, it might be unwise to rely on being able to sustain an argument that rewilding is a business rather than the simple exploitation of the asset and is in fact far closer to a rental arrangement (i.e., “renting out” the right to manage the land for farming).

The whole issue is inextricably linked to the absence of any guidance whatsoever on the fiscal implications of the new subsidy system. One assumes that the phased-out BPS payments and ELMs subsidies will be subject to Income Tax in the usual way, and in the absence of contrary legislation they will simply fall within the scope of existing FRS’s. The same could be said of the treatment of the early retirement lump sums, which some are assuming (possibly erroneously) to be capital. We have been promised clarification of the tax treatment since the latter part of 2018, but as yet nothing has appeared. Given the comments above concerning s 124 (C) one would hope that at least the position of land within an ELMs scheme night be clarified by Statutory Instrument.

Conclusion

For the time being, I think one can safely say that qualifying ancillary woodland and land in the early years of a BNG scheme (i.e., while it is still farmable) ought to be eligible for APR on the agricultural value only, and that BPR ought to be available where the BNG operation is part of a larger trading business. Otherwise, and if the potential loss of APR/BPR exceeds the value of the BNG income, it might be prudent to wait and see.

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