Agricultural property relief - will your farmhouse qualify?
Agricultural property relief (APR) from inheritance tax (IHT) is potentially extremely valuable, particularly for those who qualify for 100% relief. However, recent case law suggests that 100% relief on most farmhouses is a thing of the past and that many may not qualify for any relief at all.
There are two primary qualifications that have to be met for property to gain APR:
(i) It has to be “agricultural property”. This is defined to mean not only the agricultural land itself but also cottages, farm buildings and farmhouses which are “of a character appropriate” to the agricultural land;
(ii) The property has to be either occupied by the taxpayer “for the purposes of agriculture” for at least two years before his death, or owned by him for seven years before death and occupied “for the purposes of agriculture” throughout that period, whether by the taxpayer or another (e.g. a tenant).
Moreover it is only the “agricultural value” of the property which qualifies for APR.
To qualify for 100% relief:
- the owner has to have the immediate right to vacant possession of the property or the right to obtain it within 24 months; or
- the property must be let on a tenancy beginning on or after 1 September 1995.
In all other cases the rate of relief is 50%.
Many individuals have bought a house with agricultural land with a view to mitigating IHT through APR, but no guarantees as to qualification for APR can now be given. HMRC scrutinise all claims very closely and recent case law has been increasingly in their favour.
There have been three landmark decisions in recent years regarding APR and farmhouses:
Antrobus 1
This Special Commissioners’ case in 2002 was greeted with a certain amount of euphoria as it was decided that a substantial, but somewhat rundown, house was a farmhouse “of a character appropriate” to a small agricultural estate of about 120 acres. The case was then referred to the Lands Tribunal for determination of the agricultural value of the farmhouse.
Antrobus 2
The euphoria started evaporating following the Lands Tribunal’s decision in 2005. As well as deciding the agricultural value the Lands Tribunal not only set out their definition of a farmhouse as “the house in which the farmer of the land lives” but then declared that for this purpose the farmer is “the person who lives in the houseinorder to farm the land comprised in the farm and who farms the land on a day to day basis”. The Tribunal went on to say “We do not think that a house occupied with a farm is a farmhouse simply because the person living there is in overall control of the agricultural business conducted on the land.” These comments went strictly beyond the remit of the Lands Tribunal whose sole job was to determine the agricultural value.
The Lands Tribunal’s decision that the agricultural value of the farmhouse for APR purposes was only 70% of the open market value was not a total surprise. However, the comments on the definition of a farmer for the purpose of deciding whether a house qualified as “a farmhouse” for APR were a bolt from the blue and for the first time raised the real possibility that the owner of a farming business may not be treated as a farmer for the purpose of APR on his house.
McKenna
Following on from Antrobus 2 came the decision in McKenna (ex’ors) v IRC reported in October 2006. The Special Commissioner held that whilst each case should be considered on its own facts the comments of the Lands Tribunal in Antrobus 2 on the definition of a farmer were “helpful” in considering whether a house was a farmhouse for APR. In the instant case the house failed to qualify as a farmhouse because the owners had a contract farming arrangement, the day-to-day management of the farming was the sole responsibility of the contractor, and management of the contractor was carried out by an agent on behalf of the owners.
In the light of this, those landowners with contract farming arrangements would be well advised:
- To ensure that the farm is indeed run from their house (i.e. the farm office should be situated in the house and all the paperwork and documentation relating to the farming business should be kept there).
- To ensure that all meetings with the contractor are held at the house and are minuted.
- To be personally involved in the day-to-day management of the farm and of the contractors, and not to employ an agent to do that for them.
Unless the Commissioner’s decision in McKenna is overturned or modified by the higher Courts the following are likely to be amongst those most affected by the decision:
A lifestyle farmer i.e. a person who is not a working farmer and whose livelihood comes mainly from something other than farming. He is unlikely to be treated as “the farmer” for the purpose of establishing whether his house is “a farmhouse” for APR.
An elderly or infirm farmer. A farmhouse may not be treated as “occupied for the purposes of agriculture” if a farmer is too old or too ill to run the farm. Accordingly, our advice is that elderly farmers should not rely on getting APR and should seriously consider whether it is worth staying in the farmhouse if their aim is to pass it on to the next generation without a substantial IHT liability.
A “semi retired” farmer in a partnership who remains living in the farmhouse but has handed over the running of the farm to the next generation. It will be questionable both whether he is a “farmer” in deciding if his house is a farmhouse for APR and whether he occupies it for agricultural purposes.
The same issues are likely to arise for widows of working farmers who have contract farming arrangements and are not themselves qualified to supervise the contractor.
There will no doubt be further case law to clarify some of these issues but meanwhile uncertainty reigns.
Whether a house in a discretionary trust (or in more or less any type of trust created since 21 March 2006) qualifies as a farmhouse for APR could be of considerable significance for the ten-year periodic charge. Having said that, as the rate of periodic charge is currently only 6%, in many cases it may not be worth challenging HMRC if they seek to deny relief. HMRC are already arguing for a 30% discount to fix the agricultural value of farmhouses let on Farm Business Tenancies (where 100% relief applies) and they get away with it in many cases because the amount of IHT at stake makes it uneconomic to challenge their position. A challenge to McKenna is more likely to arise when the house claimed as a farmhouse is owned by an individual – or by a pre-22 March 2006 life interest trust – and 40% IHT is accordingly at stake.