Policy paper

Inheritance Tax — geographical scope of agricultural property relief and woodlands relief

Updated 6 March 2024

Who is likely to be affected

This measure affects individuals and the estates of deceased individuals and their personal representatives where the individual owns or owned land and/or woodlands located outside the United Kingdom (UK) in either the European Economic Area (EEA), the Isle of Man, or the Channel Islands. It will also affect trustees of trusts.

General description of the measure

This measure restricts the scope of agricultural property relief and woodlands relief to property located in the UK only.

Policy objective

To ensure compatibility with EU law, action was taken in Finance Act 2009 to expand the scope of agricultural property relief and woodlands relief to property located in the EEA. Now the UK has left the EU this measure reverses those changes so that property located in the EEA will again be treated the same as property located in the rest of the world.

This measure also reverses the expansion of the scope of agricultural property relief to property in the Channel Islands and the Isle of Man from the 1970s. This expansion occurred as part of changes which deemed those moving from the UK to the Channel Islands and Isle of Man as being domiciled in the UK and so within the scope for Inheritance Tax (IHT) on their UK and non-UK assets. However, these deemed domicile provisions were subsequently removed, placing those moving from the UK to the Channel Islands and Isle of Man in the same position as others. This change to agricultural property relief removes the anachronistic treatment and ensures that the relief is aligned in geographical scope with woodlands relief.

Background to the measure

This measure was announced at Spring Budget 2023.

Agricultural property relief is a relief from IHT available on the agricultural value of land and other property that is owned and occupied for the purposes of agriculture. This will usually be land or pasture that is used to grow crops or to rear animals.

The relief will be due at 100% if the person who owned the land farmed it themselves, the land was used by someone else on a short-term grazing licence or it was let on a tenancy that began on or after 1 September 1995. Property that was owned before 10 March 1981 can also qualify for 100% relief if certain conditions are met. In any other case, the relief due will be at a lower rate of 50%.

The property must have been owned and occupied for agricultural purposes immediately before its transfer for: 2 years if occupied by the owner, a company controlled by them, or their spouse or civil partner; or 7 years if occupied by someone else, such as a tenant farmer

Woodlands relief is a relief from IHT available on the transfer of woodlands on death. It is only available if all the conditions for the relief are satisfied.

Those liable for IHT may elect to exclude the value of the trees or underwood (but not the land itself) from an individual’s estate, provided that, if they had purchased it, the individual had owned the woodlands for 5 years.

Woodland is any land on which trees or underwood are growing so may include wooded parkland, strips of land with trees lining roads, or tree belts. Where the timber is subsequently sold, IHT will be due on the proceeds received on the sale of the timber.

Detailed proposal

Operative date

The measure will have effect on and after 6 April 2024 in relation to transfers of value, other occasions on which tax falls to be charged or other events in respect of which additional tax falls due under the Inheritance Tax Act 1984 (IHTA). Any lifetime transfers made before 6 April 2024 will continue to benefit from the rules in place at the time the transfer is made.

Current law

Current law is contained in Part I ‘General’ of the IHTA section 16(1); and Part V of the IHTA at Chapter II ‘Agricultural Property’, section 115(5)(a), section 115(5)(b), and section 116(8), and Chapter III ‘Woodlands’, section 125(1A).

Proposed revisions

Section 16(1) of the IHTA will be amended to remove reference to ‘the Channel Islands or the Isle of Man’.

Section 115(5) of the IHTA will be amended to remove reference to ‘the Channel Islands or the Isle of Man’ and ‘an EEA state’ so that Part V Chapter II of the IHTA applies to agricultural property only if it is in the United Kingdom.

Section 116(8) will be omitted.

Section 125 of the IHTA will be amended to remove reference to ‘an EEA state’ so that the section applies only if the land is in the United Kingdom.

Summary of impacts

Exchequer impact (£ million)

2023 to 2024	2024 to 2025	2025 to 2026	2026 to 2027	2027 to 2028	2028 to 2029
—	—	negligible	negligible	negligible	-5

These figures are set out in Table 5.1 of Spring Budget 2024 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Spring Budget 2024.

Economic Impacts

This measure is not expected to have any significant economic impacts.

Impact on individuals, households and families

The measure is not expected to impact on family formation, stability or breakdown.

The main impact will be on the very small number of individuals and the estates of deceased individuals who own agricultural land and/or woodlands located outside the UK in the EEA, Isle of Man or Channel Islands.

This measure is expected overall to have no impact on individuals’ experience of dealing with HMRC as it does not change any processes or tax administration obligations.

Equalities impacts

HMRC collects data about the age, sex and marital status of the deceased. The impact of this measure on groups with protected characteristics is expected to be proportionate with the population of the estates of the deceased and trustees claiming agricultural property relief and/or woodlands relief and paying IHT each year.

Impact on business including civil society organisations

This measure will have a minimal impact on businesses as most businesses will qualify for business property relief. Business property relief reduces the value of a qualifying business or its assets when working out how much IHT has to be paid. This measure is likely to only affect a very small number of estates per year.

There may be an impact on any businesses which are primarily investment businesses that hold farmland or woodland in the EEA, Isle of Man or Channel Islands as they do not qualify for business property relief.

This measure is expected to have a negligible impact on advisers and relevant businesses as they will need to familiarise themselves with the change. Customer experience of advisers is expected to remain the same as this measure doesn’t alter how advisers interact with HMRC.

This measure is not expected to impact civil society organisations.

Operational impact (£ million) (HMRC or other)

HMRC will not incur any costs implementing this change.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

This measure will be kept under review through communications with affected taxpayer groups.

Further advice

If you have any questions about this change, please contact the Inheritance Tax Policy Team by email: [email protected].