INVESTORS with capital to plough into property had good news in the Budget when the Chancellor gave in to demands to extend inheritance tax (IHT) rules.

Agricultural Property Relief (APR) for inheritance tax will now cover agricultural property and forestry owned in countries within the EU, not just in the UK.

The European Commission had said the previous system, which applied only to inherited agricultural property in the UK, Channel Islands and the Isle of Man, and forestry only in the UK, was discriminatory.

It said the rule was incompatible with free movement of capital in the EU because its limited scope might dissuade taxpayers from investing in agricultural and forestry property outside the UK.

The Government’s response was to extend the relief to cover applicable inherited property in all EU member states.

APR carries valuable relief for taxpayers who invest in farmland without farming it themselves. Farmland prices have risen year on year since the Eighties because of the so-called “lifestyle farmer”.

They are not working farmers but, by parking capital in land, especially where rents and/or Single Farm payments provided a good return on the investment, they effectively washed out the IHT due.

The upside for the real farming communities has been that tenant farmers have kept their businesses and land prices have remained buoyant. Those who own estates that have been in the same families for years benefit as they can maintain the historic farming and keep tenants while being able to pass on their vast holding to their children virtually free of IHT.

The extension of APR to all investments within Europe for those UK taxpayers liable to IHT would ordinarily be a welcome result for most tax advisers. It provides opportunities for the lifestyle farmer and other investors.

However, a word of caution. This Government is opposed to lifestyle farmers and its decision to extend APR to European investments contradicts its usual reluctance to give tax relief for investments outside the UK. Taxpayers need to hold the asset for seven years to qualify, and in seven years this relief may no longer exist.

Landed estate owners and lifestyle farmers may now have greatest cause for concern.

The Government has begrudgingly extended the relief into Europe and therefore it is the relief most likely to be pulled once the economy settles down.

■ Val Hutchinson is an inheritance tax specialist with BHP Law. She can be contacted on 0191-221-0898.