Tax relief on grass keep is under attack, warns accountant

Landowners letting land under grass keep arrangements may not get full Inheritance Tax relief under a new interpretation of the law, warns accountant Old Mill Rural Services.

Where land has a hope value over and above the agricultural value – when it is near or within a village boundary, for example – it may no longer qualify for Business Property Relief, rendering part of its value liable to Inheritance Tax, says Head of Rural Services Mike Butler.

"The tax rules have not changed at all but the interpretation of those rules is in the spotlight," he says. This follows a decision in a court case, H M Revenue & Customs v McClean, where the landowner had let land, with a significant hope premium attached to it, on a grass keep basis. Upon his death his executors sought to claim Agricultural Property Relief (APR) on the agricultural value of the land, as well as Business Property Relief (BPR) on the hope value, to remove the entire asset from Inheritance Tax charges.

"Even though the landowner had arranged for certain maintenance matters to be dealt with in-hand, including hedge cutting, fencing and ditching, the Special Commissioners decided that letting land on a grass keep arrangement was not akin to running a business, and therefore did not qualify for BPR," says Mr Butler.

"In their view, this sort of arrangement was more of an investment activity, with income being derived from the ownership rather than the use." Although APR was available because the land had been owned for at least seven years and farmed throughout that time, the land was still subject to a sizable tax charge on the hope value, he adds.

"This ruling will concern anyone who owns land with a potential worth above its agricultural value and lets it on a grass keep basis. Thankfully, the executors have appealed against the Commissioners' decision, but the case will take many months to resolve. It is therefore essential that anyone in a similar position takes professional advice and reviews their letting agreement accordingly."

Anyone intending to claim APR on the farmhouse they occupy while letting land on a grass keep basis may also struggle to qualify for tax relief, warns Mr Butler. "The best advice must be to prepare for a tax liability or take alternative action while an opportunity still exists. Doing nothing is simply no longer an option."