Inheriting Agricultural Land and Farmhouses: Legal and Tax Steps

Administering an estate that includes agricultural land or a working farm is substantially more complex than dealing with residential property. Specialist agricultural law solicitors and accountants are usually necessary. This guide covers the key areas that executors and beneficiaries need to understand, from farm subsidies and tenancies to Inheritance Tax reliefs and probate valuations.

Notifying the Rural Payments Agency

In England, farm subsidy payments under the Basic Payment Scheme (BPS) — and its successor the Sustainable Farming Incentive (SFI) — are administered by the Rural Payments Agency (RPA). When a farmer or landowner dies, the RPA must be notified of the death and the change of ownership or management as quickly as possible.

Failure to notify the RPA promptly can result in:

• Subsidy payments being made to the deceased's account and becoming difficult to recover or redirect
• Entitlements being lost if they are not transferred or claimed within the relevant scheme year deadlines
• Non-compliance penalties if the land is not being actively managed in accordance with scheme rules and no one has notified the RPA of the change in circumstances

The executor should contact the RPA (via the Rural Payments service online or by calling 03000 200 301) to report the death and establish who will manage the scheme going forward. If the land is continuing to be farmed during administration of the estate, the executor will need to take on responsibility for scheme compliance until the land is transferred or sold.

In Wales, Scotland, and Northern Ireland, farm subsidies are administered by different bodies: the Welsh Government's Rural Payments Wales, the Scottish Government's APHA / Rural Payments, and the Department of Agriculture, Environment and Rural Affairs (DAERA) in Northern Ireland. The same principle of prompt notification applies in all jurisdictions.

Agricultural Tenancies: A Critical Distinction

Agricultural land may be owner-occupied (farmed directly by the deceased) or subject to an agricultural tenancy (let to a farming tenant). These two situations are handled very differently in estate administration.

Agricultural Holdings Act tenancies (pre-September 1995)

Older agricultural tenancies governed by the Agricultural Holdings Act 1986 provide significant security of tenure to farming tenants. Critically, a close family member of a tenant who dies may have a statutory right to succeed to the tenancy — a right that can dramatically reduce the market value of the land. Before any decisions are made about selling tenanted agricultural land, the executor must establish what type of tenancy exists and whether succession rights apply.

Farm Business Tenancies (post-September 1995)

Farm Business Tenancies under the Agricultural Tenancies Act 1995 offer far less security of tenure and do not carry automatic succession rights. The tenancy will continue in accordance with its terms until it ends by notice or effluxion of time. An executor dealing with land subject to a Farm Business Tenancy should review the tenancy agreement carefully to understand notice periods, break clauses, and what obligations continue during estate administration.

Agricultural Property Relief and the Farmhouse Condition

Agricultural Property Relief (APR) under the Inheritance Tax Act 1984 can reduce the taxable value of qualifying agricultural property by either 50% or 100%. Understanding whether APR applies, and at which rate, is one of the most important tax questions in any farming estate.

APR at 100% applies to:

• Owner-occupied agricultural land and buildings that were farmed by the deceased throughout the two years immediately before death
• Tenanted agricultural land let on Farm Business Tenancies under the Agricultural Tenancies Act 1995 — subject to conditions

APR at 50% applies to:

• Agricultural land let on older tenancies (Agricultural Holdings Act 1986 tenancies), unless the landlord has vacant possession rights within 12 months of death
• Land owned for seven years but not personally farmed by the deceased (let for more than two years and not qualifying for 100%)

The farmhouse condition is a critical and often contested issue. A farmhouse qualifies for APR only if it is "character appropriate" to the agricultural holding — that is, it must be of a size and nature consistent with the agricultural activities being conducted. A large country house with a small paddock is unlikely to qualify. Additionally, the farmhouse must have been occupied by someone who was actively carrying on the farming operations. A retired farmer who had handed the farm to a son or daughter may not meet this condition.

HMRC scrutinises APR claims carefully, particularly for farmhouses and for land that was only recently acquired. It is strongly advisable to instruct an agricultural accountant or specialist solicitor to prepare the APR claim within the IHT return.

Overage Clauses and Restrictive Covenants

Agricultural land conveyancing frequently includes clauses that affect its development potential and long-term value. Executors should review the title documents for:

• Overage clauses (clawback provisions): these require the current owner to pay a proportion of any uplift in value to a previous seller if planning permission is obtained. They can run for 20 to 30 years and can significantly reduce the proceeds of any future sale with development potential
• Restrictive covenants: obligations binding the land to remain in agricultural use, not to build on certain areas, or not to carry out particular activities. These follow the land and bind successive owners
• Rights of way and wayleaves: footpaths, public rights of way, and utility wayleaves that affect how the land can be used and developed

These encumbrances should be clearly identified by the solicitor dealing with the estate and disclosed to the agricultural valuer so they can be properly reflected in the probate valuation.

Valuing Agricultural Land for Probate

Valuing agricultural land for probate purposes is a specialist task that should be undertaken by a qualified agricultural valuer — such as a rural surveyor holding MRICS or FAAV qualifications. The valuation must reflect the open market value of the land at the date of death.

There are two distinct value concepts that are particularly important in this context:

Agricultural value is the value of the land assuming it can only be used for agricultural purposes. This is the value for APR purposes — the relief is calculated by reference to agricultural value, not market value.

Hope value (or development value) is the additional value attributable to the prospect of obtaining planning permission for development — for example, housing or commercial use. If the land is near a settlement boundary or has been promoted for allocation in the local plan, it may have significant hope value that is not covered by APR.

The difference between agricultural value and market value (including hope value) is taxable at full IHT rates. Executors should be aware of this distinction and ensure the IHT return correctly separates the two components. HMRC will typically refer contentious valuations to its specialist Agricultural Holdings unit.