SVM112090 | IHT Agricultural Property Relief: Replacement Provisions (Agricultural Property)

The replacement provisions relax the occupation and ownership conditions in section 123(1)(a) IHTA 1984 where the agricultural property owned by the company at the time of the transfer has replaced other agricultural property, sections 118 IHTA 1984 and 119(1) IHTA 1984.

• the two year occupation condition in section 123(1)(a)(i) IHTA 1984 is treated as satisfied if the two (or more) properties concerned were occupied by the company for the purposes of agriculture for an aggregate period of at least two years out of the five years immediately before the transfer

and

• the seven year ownership test in section 123(1)(a)(ii) IHTA 1984 is treated as satisfied if the two (or more) properties were both owned by the company and occupied (by itself or another) for the purposes of agriculture for an aggregate period of at least seven years out of the ten years immediately before the transfer.

The relief available under sections (1) and (2) of section 118 IHTA 1984 should not exceed what it would have been had the replacement(s) not been made as stated in section 118(3) IHTA 1984. The purpose of section 118(3) IHTA 1984 is to prevent a company which has qualified for relief from increasing the amount of relief available, by purchasing a much more expensive property shortly before a death or the making of a transfer. It is an anti-avoidance provision.

The valuer should adopt a reasonable approach aimed at quantifying and agreeing the restricted relief in a practical way. The approach to be adopted is illustrated by the following example.

Example

Company A owns and farms Blackacre and has done so for a number of years.

November 2025 - Company A sells Blackacre for £1,600,000 and buys Whiteacre for £2,000,000 to increase the scope of its farming operations. Both transactions are at arm's length. Both prices are wholly attributable to agricultural value.

April 2027 - The owner of all the shares in A dies. Whiteacre then has an agricultural value of £2,250,000. The two year occupation condition in section 118(1) IHTA 1984 is satisfied.

A practical way to give effect to section 118(3) IHTA 1984 in such circumstances is to adopt the following apportionment:

Agricultural value of Blackacre at time of sale (on the facts, the sale price) divided by the agricultural value of Whiteacre at the time of the purchase (on the facts, the purchase price) x the agricultural value of Whiteacre at the date of death.

or in figures £1,600,000 divided by £2,000,000 multiplied by £2,250,000 = £1,800,000

The result of this approach is that on the death the agricultural relief (AR) on Whiteacre is limited to £1,800,000. The excess of £450,000 does not qualify for AR.

Costs of sale and of purchase should be disregarded.

It is considered that the apportionment approach set out above is a practical and equitable way of giving effect to section 118(3) IHTA 1984. However, section 118(3) IHTA 1984 does not expressly provide for such an apportionment. If in any case its application is questioned a valuer should consider how the subsection operates on the facts of the particular case.

Under section 118(4) IHTA 1984 changes resulting from the formation, alteration or dissolution of a partnership are to be disregarded for the purposes of section 118(3) IHTA 1984.

See IHTM24110 onwards.

Additional Guidance: SVM150000