Practice note 10: part 1 - identification of agricultural property
Source: gov.uk (2025-05-07)

The Valuation Office Agency's (VOA) technical manual relating to Inheritance Tax.

1. Basis for agricultural relief - section 116

The provisions for Agricultural Relief are in s116 as amended and extended. (See Part 3 below.) In order to obtain Agricultural Relief the relevant property must:-
- qualify as agricultural property under s115(2), and
- satisfy the occupational and ownership provisions of s117.
Both sections have to be satisfied.

It is possible for property to qualify as agricultural property under s115(2) but fail to achieve Agricultural Relief because it did not satisfy the occupational and ownership provisions of s117.

2. Extent of the estate - section 5

It is the responsibility of the HMRC to determine the extent of the estate under s5.

The extent of the estate will be relevant to the caseworker not only for determining the value of the entire estate when required but also when considering whether dwellings and farm buildings “are of a character appropriate to the property”. (See Part 1, para 5, Limb (3) (e)(i) below.) In this latter connection, regard may also be had to qualifying “agricultural property” which is spouse exempt under s18.

The estate comprises that property to which the transferor/deceased was beneficially entitled at the moment before transfer/death. It will include any annual agricultural tenancies (AATs), including AATs to a sole tenant, Farm Business Tenancies (FBTs), and grazing rights, though not grazing and/or mowing licences as they are not interests in property.

Doubts raised on the extent of the estate must be referred to the HMRC in accordance with para 9.65.

3. Occupation for the purposes of agriculture - section 117

It is the responsibility of the HMRC to decide if s117 is satisfied.

Property on which a claim for Agricultural Relief has been made must satisfy the occupational and ownership provisions of s117. The conditions that are to be considered are explained in para 9.66.

Procedurally, s117 is considered before s115(2), though the structure of the legislation suggests that the converse is logical.

Normally, if s117 is not satisfied, there is no need for the caseworker to consider whether the whole, or any part, of the transferor/deceased’s estate qualifies as agricultural property under s115(2). In such circumstances, the caseworker will determine only the open market value of the estate. However, if part of the estate satisfies Section 117, then the caseworker must consider whether that part of the estate qualifies as agricultural property, in whole or in part.

S117 is concerned with what actually happened on the holding. In other words, what was the nature of the activities carried out on the property by the freeholder and/or tenant or other occupier? Was the property in whole, or in part, occupied for the purposes of agriculture?

The statutory requirements of s117, including where a charge or increased charge to tax arises by reason of a transferor’s death within seven years of a life time transfer are in Chapter 1B, 9.66. That section also contains advice on procedure regarding s117.

By an Extra-Statutory Concession (ESC) dated 13 February 1995 cottages occupied by retired farm employees or their surviving spouses may be deemed to satisfy, inter alia, s117 on certain conditions. (See Chapter 1B, 9.66.)

As regards s117 and horses occupying agricultural property see Part 1, para 5, Limb (1) below.

4. Definition of agricultural property - section 115(2)

Assuming that Section 117 has been satisfied, it is necessary to decide whether Section 115(2) is satisfied in respect of the entire property or any parts thereof.

The primary statutory definition of agricultural property is set out in Section 115(2) which is as follows:

‘In this Chapter “agricultural property” means agricultural land or pasture and includes woodland and any building used in connection with the intensive rearing of livestock or fish if the woodland or building is occupied with agricultural land or pasture and the occupation is ancillary to that of the agricultural land or pasture; and also includes such cottages, farm buildings and farmhouses, together with the land occupied with them, as are of a character appropriate to the property.’

Advice on the application of these provisions in a particular case is the responsibility of the VOA.

5. Interpretation of section 115(2)

In the case of Starke v IRC 1994 STC 295 (considered below) the High Court in order to assist the interpretation divided the definition into three limbs:

limb (1) “agricultural land or pasture”

limb (2) ”and includes woodland and any building used in connection with the intensive rearing of livestock or fish if the woodland or building is occupied with agricultural land or pasture and the occupation is ancillary to that of the agricultural land or pasture;”

limb (3) “and also includes such cottages, farm buildings and farmhouses, together with the land occupied with them, as are of a character appropriate to the property.”

5.1 Limb 1 Agricultural land or pasture

The Act does not expand on the meaning of “agricultural land or pasture”. It is, therefore, appropriate that one should look at other statutory sources and case law which may provide guidance, although it must be stressed that such definitions and decisions refer to agriculture or agricultural land in different circumstances.

The definition of “agricultural property” distinguishes “land” and “buildings”; the “land” being primary and the “buildings” being secondary. The primary determinants of what is “agricultural land or pasture” are its physical nature and its use.

Agricultural land and pasture means land, the prime function of which is to grow crops or graze livestock. It follows that land, the principal purpose of which is other than agriculture, (eg. a golf course or grouse moor) would not fall within the definition of “agricultural property” even though such land may occasionally be used, or be capable of being used, for agricultural purposes. On the other hand, within such land there may be parts which are clearly “agricultural property” (eg. land on a grouse moor which is specifically made available for grazing).

Equally, the occasional use of agricultural land for purposes other than agriculture or pasture, provided the occasional use is not the primary reason for the occupation of the land, would not debar it from comprising “agricultural property” (eg. a farm over which an annual point-to-point horse race is run).

The underlying reason for ownership, for instance, as a development land bank, is irrelevant in this particular context, provided the land could be adjudged to be “agricultural land or pasture”.

There are various statutory definitions:-
- Section 96(1) Agricultural Holdings Act 1986: “agriculture includes horticulture, fruit growing, seed growing, dairy farming and livestock breeding and keeping, the use of land as grazing land, meadow land, osier land, market gardens and nursery grounds, and the use of land for woodlands where that use is ancillary to the farming of land for other agricultural purposes, and “agricultural” shall be construed accordingly.”
An identical definition of “agriculture” also appears in Section 38(1) Agricultural Tenancies Act 1995.
- Section 336(1) Town and Country Planning Act 1990: “agriculture includes horticulture, fruit growing, seed growing, dairy farming, the breeding and keeping of livestock (including any creature kept for the production food, wool, skins or fur, or for the purpose of its use in the farming of land), the use of land as grazing land, meadow land, osier land, market gardens and nursery grounds, and the use of land for woodlands where that use is ancillary to the farming of land for other agricultural purposes, and “agricultural” shall be construed accordingly. “
The above statutory definitions do not include reference to arable farming but clearly the growing of cereals and other crops is agriculture.

In a rating context, Schedule 5.2(1)(a) Local Government Finance Act 1988 states that agricultural land is, inter alia:-“land used as arable, meadow or pasture ground only.”

Different legislation applies in Scotland but the provisions are expressed in much the same way.

In Hemens (VO) v Whitsbury Farm and Stud Ltd (1988) AC 601, (a Rating case), Lord Keith of Kinkel (at page 611) when considering the rateability of buildings felt that a wider meaning was called for than limiting agricultural operations to production for human subsistence. He specifically mentions:-

“nursery grounds, where no doubt flowers and not any foodstuffs may be grown.”Therefore, arable land which is used to grow crops which are not, even indirectly, grown for food, irrespective of whether for human or animal consumption, may, nevertheless, be regarded as being “agricultural property”.

While it may follow from the Hemens case that land used to graze horses may be pasture and, therefore, be “agricultural property”, nevertheless, the CTO would not grant Agricultural Relief as it would not be used for the purposes of agriculture under s117, unless the horses were used for agricultural purposes or were on a stud farm. This point was confirmed in the decision, albeit of the Special Commissioners, in Wheatley v CIR 1998 SpC 149.

It would not be practicable to lay down more detailed rules. Provided at the date of transfer/death the land could be adjudged to be “agricultural land or pasture” then s115(2) is satisfied.

Part 1, para 6 below sets out various miscellaneous uses of land and indicates whether or not they may be considered as agricultural.

5.2 Limb 2 - Woodlands and Buildings

Agricultural property includes woodland and any building used in connection with the intensive rearing of livestock or fish if the woodland or building is occupied with agricultural land or pasture and the occupation is ancillary to that of the agricultural land or pasture

5.2.1 Woodland

Woodland is only “agricultural property” if it is occupied with, and its occupation is ancillary to, agricultural land or pasture. Included in this category would be woodland shelter belts, game coverts, fox coverts, coppices (usually of chestnut or hazel) grown for fencing materials on the farm and clumps of amenity trees or spinneys. However all such types of woodlands must be occupied with agricultural land or pasture. If they are not so occupied they will not be “agricultural property” even if the woodland is itself ancillary to the land, eg. shelter belts excluded from a farm tenancy agreement and woodlands independently let for sporting purposes.

Woodland is specifically mentioned in Limb (2) of the statutory definition. Unique to Limb (2), the “agricultural land or pasture” does NOT have to be owned or rented by the transferor but there must be a unity of identity of occupation as between the woodland and the “agricultural land or pasture”. For example, if the transferor/deceased owned woodland which he let to a third party who occupied it together with agricultural land (which was neither owned nor rented by the transferor/deceased), then, provided the third party’s occupation of the woodland was ancillary to that of the “agricultural land or pasture”, the transferor’s woodland would qualify as “agricultural property”.

In this context, there is no statutory guidance or case law in respect of the term “ancillary”. Therefore, its normal dictionary use meaning “subordinate to” should be employed. Some of the woodland may qualify as “agricultural property” though possibly not all of it. In determining what qualifies, the caseworker should decide how much of the woodland may be required to service all the agricultural needs of the occupier’s holding. This requires a practical approach.

Woodlands occupied for other than agricultural purposes (eg. amenity park land), or woodland used for the production of commercial timber, will not be “agricultural property” but they may be eligible for either Woodland Relief (see 1B, Section 10) or Business Relief (see 1B, Section 11).

5.2.2 Short Rotation Coppice

Short rotation coppice is defined, by s154(3) FA 1995, as follows:-

“a perennial crop of tree species planted at high density, the stems of which are harvested above ground level at intervals of less than ten years.”

For transfers occurring on or after 6 April 1995 short rotation coppice is to be regarded as agriculture and the land on which it is carried out as qualifying “agricultural land” under s154(2)(a) FA 1995. Buildings used in connection with short rotation coppice are to be regarded as “farm buildings” under s154(2)(b) FA 1995.

5.2.3 Buildings used in connection with the intensive rearing of livestock or fish”

As with “woodland” this category of farm buildings is also mentioned in limb (2). There is an identical requirement that such buildings used in connection with the intensive rearing of livestock or fish be occupied with, and their occupation must be ancillary to the occupation of, “agricultural land or pasture”. Unlike the case of “farm buildings” in Limb (3), the “agricultural land or pasture” referred to in Limb (2) does not have to be owned or rented by the transferor/deceased but there must be a unity of identity of occupation as between these buildings and “agricultural land or pasture”. (Note in Limb (2) the absence of the term “the” immediately before “agricultural land or pasture”.)

It is difficult to see how, for instance, the occupation of a large number of buildings used for the intensive rearing of livestock could be said to be ancillary to a small hectareage of “agricultural land or pasture”.

As far as fish farms are concerned, in the context of “any building used in connection with the intensive rearing of livestock or fish”, one may include adapted or constructed ponds but not streams or rivers.

Due to the availability of Business Relief, generally at the same rate as Agricultural Relief (see 1B, Section 11), there should be few difficulties in practice where the transferor/deceased used such buildings in connection with his business. However, if such buildings (or indeed any buildings or land) owned by the transferor/deceased are used by a partnership of which he is a partner but are not underlying assets of the partnership, the level of Business Relief, if granted, would be at the lower level. Where any buildings (or land) comprise an interest of a landlord who has no interest in the business carried on in them then Business Relief would not be available.

5.3 Limb (3) Cottages, Farm Buildings and Farmhouses

“and also includes such cottages, farm buildings and farmhouses, together with the land occupied with them, as are of a character appropriate to the property”

5.3.1 Cottages

Case law on the definition of the term “cottage” is limited. In common usage it is the dwelling of someone employed for agricultural purposes in connection with the property. Therefore, it usually pre-supposes that there is also a “farmhouse”.

Where a farm or an agricultural estate has farm “cottages”, the test is whether they are of a type and number which might reasonably be expected to be found on such a holding. An important but not necessarily conclusive factor would be the number of employees required to work on it.

Occasionally, where a “cottage” that might satisfy Section 115(2) is temporarily vacant, but is genuinely being held for the purposes of agriculture, it may be treated as satisfying Section 117 but that is for the HMRC to decide. Details concerning all vacant cottages must be communicated to the HMRC.

Having decided that a dwelling is a “cottage” in an agricultural context, the caseworker must then decide whether it is “of a character appropriate to the property”, which is considered below. In considering the character appropriateness of a cottage this should be done in the context of the presence of the “farmhouse” and any other cottage serving that holding.

Provided a cottage satisfies Section 117 and is “of a character appropriate to the property”, it may qualify as “agricultural property” and, thereby, for Agricultural Relief. This will be so even if the “farmhouse” fails to qualify because it is not “of a character appropriate to the property”, perhaps, because it is too large.

5.3.2 Cottages occupied by retired farm employees or their surviving spouses

By an Extra-Statutory Concession (ESC) dated 13 February 1995, cottages occupied by retired farm employees or their surviving spouses may be eligible for Agricultural Relief. It would seem to follow from the wording of the ESC that to attract relief such cottages must also be “agricultural property”. However, the CTO are concerned that a rigorous interpretation of this ESC may defeat its purpose. Their instructions are, therefore, not to apply the “character appropriate” test in s115(2) to cottages occupied by retired farm employees or their surviving spouses, and not to have regard to such cottages when considering other cottages in the estate, unless any of the following circumstances apply:

a) There is some physical characteristic of the cottages, such as their size, that makes them inappropriate for occupation by farm employees.

b) There are more cottages occupied by retired farm employees than by active farm employees on the estate.

c) There is reason to believe that when the retired farm employees were employed it was not on property in the deceased/transferor’s estate as at the date of transfer/death. An example would be if there had once been a larger estate on which the retired farm employees were employed but a substantial part no longer belonged to the transferor/deceased.

If any of the above circumstances apply and if such cottages would not qualify as “agricultural property” because they are not “of a character appropriate to the property”, then advice must be sought from the HMRC Technical before this view is communicated to the parties. (See Chapter 1B, 9.66 and Part 2, para 5 below.)

5.3.3 Farm Buildings

All “farm buildings”, other than those used for intensive rearing (ie. Limb (2)) must be “of a character appropriate to the property”. The term “of a character appropriate” is considered in detail in Part 1, para 5, limb (3) (e)(ii)below. The term “the property” in this context (which is also considered in some detail in Part 1, para 5, Limb (3) (e)(i) below) is the qualifying “agricultural land or pasture”, including any “woodland and any building used in connection with the intensive rearing of livestock or fish” provided they qualify as “agricultural property” within the estate.

Generally, it may be expected that “farm buildings” within Limb (3) will be appropriate to the “agricultural land or pasture”. However, this may not be so either where there is a very small area of land or in situations where substantial areas of land have previously been disposed of leaving a surplus of farm buildings. In such circumstances, only some of the farm buildings may be “of a character appropriate to the property.” Any excess of such buildings, even if they too were occupied for the purposes of agriculture under Section 117, may not qualify as “agricultural property” under Section 115(2). (Where this is so, those that do not qualify for Agricultural Relief may, nevertheless, qualify for Business Relief.)

A reasonable common sense view of buildings/structures should be taken. The architectural design and appearance, even the original purpose for which a building was erected, is irrelevant. Provided it was used for, or held for the seasonal use of, agriculture it may be treated as a farm building.

5.3.4 Farmhouses

The term “farmhouse” is not defined in the Inheritance Tax legislation but the dictionary definition and decisions of Scottish Income Tax case law point to it being the building used by the person running the farm, that is, the centre of his agricultural operation. If the dwelling falls within this description, it is, prima facie, a “farmhouse”. The principal characteristic of a “farmhouse” is the primary purpose for which it is occupied. Therefore, function determines whether or not a house is a “farmhouse”. However, the mere fact that a small parcel of land is being farmed from a dwelling does not necessarily mean that that dwelling is a “farmhouse”. The operation should be agricultural in nature and not merely incidental to the occupation of the dwelling.

It follows, therefore, that an agricultural holding will usually have need of only one “farmhouse”. Where two or more are claimed on one holding (eg. as in the case of two or more partners), the additional dwellings are more likely to have the characteristics of farm cottages in terms of use but, even so, they still have to be “of a character appropriate to the property”.

Mansion houses, although mentioned in the old Estate Duty definition of “agricultural property”, are not mentioned in the CTT/IHT legislation. Nevertheless, a mansion house may qualify as the “farmhouse”, provided it is in the nature of a “farmhouse”, i.e. it is the dwelling from which the agricultural operation is run. However, if the house is extravagantly large for the purpose for which it is used, or has been constructed on an elaborate and expensive scale, it may, notwithstanding the purpose of its occupation, have fallen outside the category of “farmhouse” and into something much more grand. More usually, a large estate is effectively run from the farm manager’s residence, which is more likely to be the “farmhouse” and more likely to be “of a character appropriate to the property”. Where a mansion house does not qualify as “agricultural property” care should be taken in deciding whether any of the land occupied with it qualifies as “agricultural property”, be it amenity woodland or pleasure grounds. However, park land, for example, may qualify as “pasture”.

Architectural appearance, disregarding size, is not considered significant. It may embrace any style of design and layout of any period, conventional or unconventional. There is no stereotype for a “farmhouse”.

If the dwelling is not a “farmhouse”, then it will not qualify as “agricultural property” but, if it is, then, it must cross the additional hurdle of being “of a character appropriate to the property” to qualify as “agricultural property”.

5.3.5 Together with Land Occupied by Them

“Land” in the context of Limb (3) refers to the sites or curtilages of “cottages, farm buildings and farmhouses” and their associated gardens, yards, etc. However, gardens, etc, of dwellings that do not qualify as “agricultural property” are not themselves “agricultural property”.

5.3.6 Of a Character Appropriate Step 1 - Identification of ‘The Property’

Having decided that a building is a “cottage”, or “farm building”, or “farmhouse”, the caseworker has next to consider whether it is “of a character appropriate to the property”. Before considering this step it is essential to be sure of exactly what is “the property” to which regard may be had for character appropriate purposes. This may not extend to all the qualifying “agricultural property” within the estate. Frequently, the facts on this point are not clear. Although this is a matter for the HMRC to resolve, the following guidance is provided not least to assist caseworkers in seeking clarification of instructions.

Although in most cases it may be obvious, determining the extent of “the property” is frequently not straight forward. It is essential to know what “agricultural land or pasture” there is within the estate of the transferor/deceased in order to decide whether or not “cottages, farm buildings, and farmhouses” are “of a character appropriate” to it.

For character appropriate purposes the caseworker may also have regard to that woodland and those buildings used for intensive rearing of livestock or fish which qualify as “agricultural property” under Limb (2). However, regard may not be had to other woodland.

It is axiomatic when considering within the transferor/deceased’s beneficial estate whether property in Limb (3), i.e. “cottages, farm buildings and farmhouses”, is “of a character appropriate to the property”, i.e. the “agricultural land or pasture” in Limb (1), that there is a unity of identity of occupation as between the elements in Limb (3) and Limb (1).

In the case of the “farmhouse”, the principle is that the “agricultural land or pasture” must be farmed from that house and the transferor/deceased must have a beneficial interest in that land. This is so even if the interest was an annual agricultural tenancy that had a nominal value (for example, on the death of a sole tenant where the CTO would not refer the value of the AAT to the DV).

There are a number of permutations upon which land may be held at the date of transfer/death to which the caseworker may, or may not, have regard when deciding whether or not “cottages, farm buildings and farmhouses” are of a “character appropriate to the property”.

When considering whether “cottages, farm buildings and farmhouses” are of a “character appropriate”, the following list shows the main examples of land to which the caseworker should have regard for Section 115(2) purposes:-

(a) land held FHVP

(b) land held FH subject to grazing and/or mowing licences (Section 2(3) AHA 1986)

(c) land rented on protected AATs and FBTs

(d) land rented on Gladstone v Bower tenancies

(e) land held as an underlying asset of a company with the benefit of vacant possession or land rented by a company on protected AATs, FBTs or Gladstone v Bower Tenancies, provided the transferor/deceased was the controlling shareholder

(f) land held as underlying assets of a partnership of which the transferor/deceased was a partner

(g) where the transferor’s freehold interests are subject to one or more AATs or FBTs, the land within those AATs and FBTs provided it is farmed from the farmhouse

Regard may also be had to land in the above categories which qualifies as “agricultural property” under Section 115(2) even if it will fail to secure Agricultural Relief because it was not occupied for the purposes of agriculture as required by Section 117. The reason for this is that Section 115(2) is merely concerned with what qualifies as “agricultural property.” Examples of this category of land is pony paddock land and, possibly, park land.

Additionally, regard should be had to qualifying “agricultural property” which is spouse exempt provided it falls into one or more of the above permutations, though not those permutations set out below. (An example would be of an in-hand farm comprising a farmhouse and 40 hectares of which 38 hectares are spouse exempt.)

When valuing for lifetime transfers, (eg. failed Potentially Exempt Transfers (PETs)), the caseworker should have regard to “agricultural land or pasture” and any qualifying “farm buildings” in any of the above categories the moment BEFORE transfer and not confine himself to the qualifying “agricultural property” which was the subject of the transfer.

The following list comprises examples of property to which the caseworker should not have regard when considering if “cottages, farm buildings and farmhouses” are “of a character appropriate”:-

(a) Where part of the land and farm buildings are let away on an AAT or FBT from the retained in-hand property

(b) Where part of the land and farm buildings are let away on a Gladstone v Bower tenancy from the retained in-hand property

However, there is an exception to (a) and (b) in the list immediately above. Where someone, perhaps a relative, resides in the transferor’s “farmhouse” and farms “agricultural land or pasture” rented from the latter, in which agricultural tenancy the transferor/deceased has no interest (ie. as a co-tenant or partner), the farmhouse is effectively the “farmhouse” for the tenanted land. In such circumstances the caseworker should have regard to that land which is part of the transferor/deceased’s estate

(c) Where land is held on grazing and/or mowing licences

(d) In cases where someone, perhaps a relative, resides in the transferor/deceased’s “farmhouse” and farms “agricultural land or pasture” nearby which is either owned by the relative or rented by him from a third party (and the transferor/deceased has no interest in that tenancy) the caseworker should take no account of that land as it is not in the transferor/deceased’s estate

(e) Land used as lawn, kitchen garden or pleasure garden in connection with a dwelling not itself “agricultural property”

5.3.7 Of a Character Appropriate Step 2 - Is the property of a Character Appropriate?

Having decided that the building is a “cottage”, “farm building” or a “farmhouse” and what is the extent of the property to which regard may be had in respect of that particular building, the next step is to consider whether the building is “of a character appropriate to the property”.

The only guidance which the courts have given as to the approach to determine whether a building is “of a character appropriate to the property” is that of Blackburne J in Starke v IRC [1994] STC 295 at page 298h:-

“…..cottages, farm buildings and farmhouses…… will constitute “agricultural property” if used in connection with agricultural land or pasture provided that they are of a character appropriate to such agricultural land or pasture (that is, are proportionate in size and nature to the requirements of the farming activities conducted on the agricultural land or pasture in question)…..”

However, these comments should be treated with a degree of caution. The point at issue in Starke was limb (1); not limb (3). The references to limb (3) were incidental and obiter dicta. Also, whilst in Starke no consideration was given to alternative types of farming activity, it is suggested that the judgement should be based on the property itself and not on the way it has been used by the transferor/deceased.

A way of approaching this task is to ask oneself the question would a reasonable man (a sort of rural equivalent of the man on the Clapham omnibus) regard the “farmhouse” as appropriate. In other words, is it proportionate in size and nature to the requirements of farming activities one might reasonably expect to find conducted on the qualifying “agricultural property” by a fit and able person occupying the property for the purposes of agriculture as at the date of transfer/death. It is not possible to lay down strict rules but consideration of the following points is recommended:-

(a) Primary Character

Is the unit primarily a dwelling with some land or is it an agricultural unit incorporating such a dwelling as is appropriate? This criterion might be considered an instinctive test as it seeks to gain a comprehensive impression of the nature of the property.

Is the property as a whole an agricultural unit or is it a country dwelling with some of the characteristics of an agricultural unit, i.e. some land, albeit amounting to a small area, and a few buildings, but which is not suitable primarily for agricultural use?

`Although it is not conclusive evidence, not least for the possible necessity of lotting, one may consider the way a property has been, or would be, described for sale.

An historical association with agriculture and traditional physical appearance do not in themselves determine the character appropriateness of a particular “farmhouse” to its “agricultural land and pasture” as at the date of transfer/death. The primary character may in fact be residential rather than agricultural, despite its history and traditional appearance.

The primary character of the property invites comparison.

(b) Local Practice

Is it normal for land of this quality, use and size to have with it a dwelling of this type and size? The comparison should be with local functioning agricultural holdings rather than with primarily residential holdings.

When searching for evidence of local practice one is not confined to properties that have been sold, in whole or in part, possibly in lots to different purchasers, nor to settled IHT cases. Evidence of let holdings may be particularly helpful. The intention is simply to see what is normal in the area.

The purpose of this criterion is to establish the pattern of the type, size and quality of holdings that function primarily as agricultural properties in the area.

If the evidence of local practice is lacking or exceedingly sparse, among the possible reasons may well be that such holdings are not capable of financially supporting a dwelling such as the one the caseworker may be considering or, indeed, one at all.

(c) Financial Support

Is the size and character of the dwelling commensurate with the scale of agricultural operations that could be conducted on the land by a reasonable person as at the date of transfer/death? Is this the sort of dwelling that one would expect to be occupied by a person conducting such a business?

In this context the following comments may be of assistance:-
- One should look at what reasonable level of income could be derived from the unit. Whilst a transferor/deceased’s accounts may be of assistance, it is often the case that, due to ill health and/or infirmity, the transferor/deceased may not have been able to continue to farm to a level one might expect in a younger or fitter person.
- One must consider the matter as at the date of transfer/death, but bear in mind that farming is a long term business subject to cycles of varying profitability. The fact that a particular agricultural enterprise is not profitable at that date does not mean it is inappropriate to have the subject house or, indeed, any house. On the other hand, if a particular house was appropriate many years ago that does not necessarily mean that it is appropriate at the date of transfer/death, even if there have been no changes in the size of the holding since its acquisition by the transferor/deceased.
- Although agriculture is generally embarked upon to provide a livelihood, not merely a means of maintaining structures of building, hedges and gates, watercourses, etc, one is not considering a strict, economic viability test of the holding. Therefore, one should not have regard to such things as rental value or a return on capital. Neither should one have regard to other sources of income which are personal to the particular transferor/deceased or occupier, if different, such as investments, personal and state pensions.
The above criteria are not set out in any order of importance nor are they an exhaustive list. It is possible that a dwelling might be judged not to be “of a character appropriate to the property” without failing all the criteria. It is equally possible that a dwelling might be judged to be “of a character appropriate to the property” without satisfying all the criteria. Depending upon the physical facts of each case the weight to be attached to each of these criteria might well vary.

The question of character appropriateness has to be decided upon what existed at the property at the date of transfer/death; not the potential following substantial long term capital investment consequent upon the hypothetical sale. To do otherwise would be to change the nature of the property being considered.

When determining whether “cottages, farm buildings and farmhouses” are of a “character appropriate”, the caseworker should consider the property itself rather than the lifestyle of a particular occupier. A dispassionate or objective approach should be adopted. The character appropriate condition in s115(2) requires consideration of the physical nature of the property which means having regard to the quality of the land, farm buildings and other agricultural infrastructure.

It must be stressed that the above criteria have no statutory or case law authority as yet but are considered to be a reasonable and practical approach in determining the meaning of the term “character appropriate”.

6. Miscellaneous agricultural property

6.1 Stud farms - Section 115(4)

S115(4) provides that:

“For the purposes of this Chapter the breeding and rearing of horses on a stud farm and the grazing of horses in connection with those activities shall be taken to be agricultural and any buildings used in connection with those activities to be farm buildings.”

The expression “the breeding and rearing of horses” should be interpreted as “the breeding and/or rearing of horses”.

There is no statutory definition of a “stud farm” and a reasonable common sense view should be taken of borderline cases. The keeping of one or more stallions is not to be regarded as essential. However, the keeping of horses for recreational purposes would not constitute a stud farm.

6.2 Gardens etc. of non-agricultural dwellings

Land used as a lawn, kitchen garden or pleasure garden in connection with a dwelling (not itself “agricultural property”) should not be regarded as being within the definition of “agricultural property”.

6.3 Growing crops

Crops which at the date of transfer/death were being grown on agricultural land or pasture by a transferor/deceased whether as freeholder, tenant, in partnership or as a director of a farming company, whilst being legally part of the land should be excluded from the valuation, and will be dealt with by the CTO.

6.4 Sporting rights

Sporting rights, as long as their exercise is consistent with normal agricultural use and they are not run commercially, should be treated as agricultural property. Agriculture may include the shooting of animals and birds that consume or damage crops and prey on livestock.

6.5 Fishing rights

Fishing is not agriculture.

6.6 Environmental Management Agreements

The way in which UK Governments support farming has been changing. Environmental Management Agreements (EMA) schemes have been introduced in England to deliver public goods and drive environmental improvements. Similar initiatives are being developed in Scotland, Wales and Northern Ireland.

Most EMA schemes involve land that remains in agricultural use and thus will qualify for Agricultural Property Relief (APR) under IHTA84/S115(2).

Examples of EMA actions that continue to meet the IHTA84/S115(2) definition of agricultural land or pasture may include but are not limited to:

(i) areas of land planted with hedges or trees to create ‘in field’ or ‘around field’ low density agroforestry where the land continues to be grazed or in arable / horticultural use

(ii) creation of grass buffer strips on arable and horticultural land

(iii) low / no input grassland which continues to be grazed by livestock of cut for preserved forage

In some instances, land use change may be more significant and agricultural use may cease. Concerns were raised that some land and property previously occupied for the purposes of agriculture would no longer be eligible for Agricultural Property Relief (APR) from Inheritance Tax if it entered an EMA. To prevent this being a barrier to land use change the Government legislated to extend APR to land and property covered by a qualifying EMA.

The Finance Act 2025 S61 introduced a new S124C into the Inheritance Tax Act 1984 (replacing an earlier S124C relating to land entered into habitat schemes). The new section extends APR to land in qualifying EMA. It applies to deaths and other transfers of value, including lifetime gifts and charges on relevant property trusts, on or after 6 April 2025.

6.6.1 Requirements in order to benefit from IHTA84/S124C

Requirement 1 – ‘the two 2-year rule’

Land must have been ‘agricultural property’ throughout the period of two years ending with the day the land became subject to the EMA, IHTA84/S124C (1)(a). This ensures that land that was not previously agricultural is excluded from the provisions, a key policy objective.

Example:

Land owned by Ms Smith and used as livestock pasture for two years before it became subject to a qualifying EMA (as a result of which all agricultural activities stopped) would meet this condition. Land that was previously used as a quarry or golf course and had subsequently been entered into a qualifying EMA would not qualify.

Requirement 2 – Date of agreement

The APR extension will apply to:
- new agreements that commenced on or after 6 March 2024
- an agreement or undertaking entered into before 6 March 2024 if it remains in place on or after 6 March 2024
Requirement 3 – The essentials of a qualifying agreement

In order to qualify for the APR extension, land is entered into a qualifying agreement. A qualifying agreement must have the following essential characteristics:
- legal enforceability
- be between the occupier of the land or a person with a right in that land and a public authority (or a person acting under arrangements with a public authority in relation to the exercise of the authority’s functions)
- exist for the purpose of protecting, restoring, or enhancing the natural environment, or natural resources, of land or water
- the land must have been used and managed in accordance with the agreement
It is the HMRC caseworker’s responsibility to determine if the land and property has been entered into a qualifying agreement, and the terms of the agreement complied with. In the event of doubt, VOA caseworkers should seek advice from the instructing caseworker at HMRC.

Requirement 4 - Ownership and occupation qualifications

The ownership / occupation requirements of IHTA84/S117 that apply to all agricultural land remain unchanged. The land or property must have been
- occupied by the deceased/transferor for the purposes of agriculture throughout the two years preceding the transfer, IHTA84/S117(a)
or
- owned by the deceased/transferor throughout the seven years immediately preceding the transfer and the property must have been occupied throughout the period for the purposes of agriculture, IHTA84/S117(b)
When considering what are the ‘purposes of agriculture’ in relation to land subject to a qualifying EMA, IHTA84/S124C (1)(b) states that property will be regarded as being occupied for the purposes of agriculture if it was used and managed in accordance with the agreement (whether or not that agreement is still in place).

Example

Ms Smith entered land that she had owned for 10 years and had previously used for grazing livestock into a qualifying EMA on 2nd January 2025. Agricultural activity ceased. She died on 1st May 2025. The land will qualify for the APR EMA provisions if it can be evidenced that:
- a qualifying agreement was in place at the date of death
- the qualifying agreement was dated post 6 March 2024 (or otherwise was unexpired at 6 March 2024)
- the land has been used and managed in accordance with the qualifying agreement
- it can be demonstrated that the land was in agricultural use for two years prior to the qualifying agreement commencing
- IHTA84/S117 ownership/occupation requirements have been met
In this example all the tests are met and evidenced.

6.6.2 Application to houses and buildings - ‘Character appropriate’

For a building qualify as character appropriate under S124(C) it must not otherwise qualify as agricultural property under IHTA84/S115(2).S115(2) takes precedence.

The following requirements will need to be met for a building, including a house or cottage, to be of a character appropriate under S124(C)
- The building must be used in connection with an EMA. In the case of an expired EMA, there must be continuance of use and management of the land for the EMA purpose.
- The building may be purpose built to be used solely in connection with the EMA.
or
- Immediately before conversion to EMA use, the buildings were occupied together with, and of a character appropriate, at that time, to agricultural land and pasture having regard to IHTA84/S115(2).
Where a building is occupied together with both agricultural land under IHTA84/S115(2) and EMA land treated as agricultural property under IHTA84/124C, the character appropriate test is applied to all the land (IHTA84/S124C(3)).

Example

If the owner had entered 90 acres of their 300-acre farm into a qualifying agreement, while continuing to farm the remaining 210 acres, you should consider whether the buildings are of a character appropriate to the whole 300 acres they are occupied with.

VOA caseworkers should have regard to IHTA84/S115(2) and established case law tests. Guidance is provided at IHT manual Practice Note 10 Part 1 ‘Identification of Agricultural Property’.

VOA caseworkers should obtain technical advice from CVG DVS Professional Guidance Team in the event of a query.

6.6.3 Valuation Considerations

Agricultural Value

The provisions of IHTA84/S124C(4) will only apply if S115(3) does not. For example, if the deceased continued to occupy land for agricultural purposes while also claiming payments under the Sustainable Farm Incentive (SFI), the agricultural value of the land and other property occupied with it should be ascertained in accordance with S115(3).

The agricultural value of land subject to an EMA shall be valued as if it were subject to a perpetual covenant prohibiting its use otherwise than in accordance with the EMA (whether or not the agreement is still in place) IHTA84/S124C(4).

VOA caseworkers may find sales of land subject to statutory nature designations and wildlife and habitat protection areas useful when considering the value of land subject to a hypothetical covenant under IHTA84/S124C. Examples include but are not limited to Sites of Special Scientific Interest, Special Areas of Conservation, Special Protection areas, Ramsar wetland areas and land within Biosphere designations. Land planted with trees should be valued having regard to comparable evidence having regard to RICS Valuation of Woodland and Forests Professional Standard.

VOA caseworkers must request sight of the qualifying agreement, as the agricultural value will reflect the terms of the actual EMA for the subject property. Considerations will include whether the qualifying agreement allows permissible associated uses. For example, ‘stacking’ different nature market options (such as the sale of carbon credits) to generate private finance. These permissible activities should be reflected in the valuation under IHTA84/S124(C).

Market Value

The market value in accordance with IHTA84/S160 will reflect the terms of the actual EMA agreement, as this is a ‘real world’ contractual agreement. Whist the agricultural value assumes a perpetual covenant prohibiting its use otherwise than in accordance with the EMA, the market value can have regard to potential alternative uses on the expiry of the EMA.

It is anticipated that in most cases in the early years of an EMA the market value will not be higher than the agricultural value. This is because any potential higher value alternative uses (not permitted by the EMA) cannot be realised until some considerable time in the future. As the EMA nears its expiry date, and potential higher value alternative uses are more imminent, the market value may exceed the agricultural value.

The CVG DVS Professional Guidance Team are available to assist with any case queries.

Valuation Example

10 acres of grade 4 stock grazing land converted to landscape recovery habitat land in April 2025. Value prior to conversion was £6,000 per acre and this was the most valuable use, and thus the Market Value and the Agricultural Value were identical.

Value after conversion is £5,000 per acre having regards to SSSI comparable sales. The EMA is for a term of 30 years with no break or early exit provisions. The deceased received a grant to assist with the change of use and it is expected carbon credits associated with peat land restoration measures will be sold on private nature markets in future. The sale of carbon credits is allowable under the terms of the qualifying agreement.

EMA Agricultural Value IHTA84/S124C(4)

Value under perpetual EMA £5,000 per acre x 10 acres = £50,000 having regard to comparable evidence

Value associated with carbon credit generation potential to be reflected in addition at £5,000 given comparable sales do not reflect this same potential.

Agricultural Value: £55,000

Market Value IHTA84/S160

In this example, the agreement is actual, and will prevent alternative use, such as reversion to grazing or even development, during its duration of 30 years. It is anticipated the market value will not be higher than the agricultural value in the early years of the EMA.

However, in the scenario above, if the EMA has only three years remaining, reversion to grazing can be contemplated when considering the market value.

Grazing land value £6,000 per acre deferred 3 years at 3% = £5,825 per acre.

Market Value of the 10 acres = £58,250

This assumes that there is no statutory designation preventing the land from being converted back to agricultural use and there is no cost of conversion to consider.

If at that time, development for some non-agricultural use is permissible and likely, the market value can also reflect that potential.

The EMA agricultural value will remain at £55,000 as the perpetual covenant is assumed to remain in force even if it has expired.

6.6.4 Historic Habitat schemes

For deaths and other transfers of value before 6 April 2025, IHTA84/S124C as introduced by FA97/S94 remains in force.

This stated that where any land is in a habitat scheme -

(a) the land shall be regarded as agricultural land

(b) the management of the land in accordance with the requirements of the scheme shall be regarded as agriculture; and

(c) buildings used in connection with such management shall be regarded as farm buildings.”

It is not anticipated that HMRC will require valuation advice from the VOA in respect of any of these historic schemes. Any requests received should be referred to the CVG DVS Professional Guidance Team who will assist with any case queries.