Three recent cases bring Agricultural Property Relief from
Inheritance Tax into the spotlight.
A key component of any successful Agricultural Property Relief
(APR) claim on death or lifetime transfer is "occupation" of
property for the purposes of agriculture. That should be
(relatively) straightforward to show in the case of agricultural
land. The same could be said for agricultural buildings occupied
with the land, although problems can arise if the farm diversifies
and buildings start to be used for some other purpose, or sub-let
to non-agricultural tenants. It can, however, be harder to say that
farm cottages or the farmhouse are literally "occupied for the
purposes of agriculture", when the cottage or house is essentially
a private home.
However, the APR legislation does allow cottages and farmhouses
to qualify for APR and there are specific provisions relating to
both. Cottages can qualify for 100% APR and, notably, without any
discount applied against the open market value. Relief can even
apply if the occupier is a retired farm worker or their
widow/widower (although relief may not be at 100% if the occupancy
is statutory protected). Small gaps in occupation are generally
allowed, perhaps through illness or a vacancy before a new employee
is hired. However, all of these favourable provisions will only
come into play if it can be shown that the property is "occupied
for the purposes of agriculture". There must be an "objective
connection" between the occupation of the house and the
agricultural activities on the farm. For example, there will be no
argument if the occupant is a full time herdsman or milkman, living
on the farm by occupational necessity, but the question of the
purpose of the occupation can become more difficult where
occupation on the farm is not necessary or relates less closely to
the physical farming activities. Farmhouses can present even
greater hurdles in proving agricultural occupation, particularly if
all farm decisions and meetings take place at the farm office some
distance from the house. Further, the IHT legislation also requires
that a farmhouse be of a 'character appropriate' to the farmland
and buildings occupied (but importantly, as we shall see below, not
necessarily owned) with it.
The last 12 months have provided us with some interesting
decisions from the tribunals in just this area of 'occupation'.
In the case of Atkinson, in 2010 the First-tier Tax Tribunal
(FTTT) held that a farm cottage qualified for APR even though the
occupant, Mr Atkinson, had moved into a care-home for the four
years prior to his death. The FTTT held that the partnership (of
which Mr Atkinson was a partner) occupied the cottage for the
purposes of agriculture because the cottage was kept ready for Mr
Atkinson's return and because the other partners visited it
regularly to collect post and carry out repairs. In 2011 the Upper
Tribunal overturned the FTTT's decision saying that there was no
'objective connection' between the occupation of the cottage and
the farming activity at the time of Mr Atkinson's death. The
primary purpose of the cottage within the farming operations was to
provide Mr Atkinson with a private home from which he could help
run the farm. Once he moved out and was unlikely to return, that
primary purpose (which had been the only purpose justifying the
conclusion that its use was occupation for the purposes of
agriculture) was no longer satisfied. On the specific case facts it
may have been possible for the cottage to continue to be occupied
by the family farming partnership (of which Mr Atkinson had been a
partner) by carrying out agricultural activities at the cottage,
and thereby allowing agricultural occupation to be 'taken over'
after Mr Atkinson left, but this was not shown to be the case.
The case of Hanson in 2011 is extremely interesting in relation
to the 'character appropriate' test for farmhouses. Since at least
2003 it had been understood that the IHT legislation required the
farmhouse to not only be of a character appropriate to the farmland
and buildings occupied with it, but also required that the land and
buildings all to be in the same ownership as the farmhouse. In
Hanson, the FTTT noted that the APR legislation says nothing about
a requirement of common ownership between a farmhouse and the land
farmed with it (to which the house is of a character appropriate).
In the case, Mr Hanson owned the farmhouse through a trust. Mr
Hanson's son lived in the farmhouse and farmed 215 acres of land
from the house. Only a very small proportion of the land (25 acres)
was owned by Mr Hanson and therefore in the same ownership as the
farmhouse for IHT purposes. HMRC argued that there was insufficient
agricultural land in both common ownership and common occupation
with the farmhouse for the farmhouse to pass the character
appropriate text. The FTTT rejected this argument and concluded
that, whilst the farmhouse needed to be in the same occupation as
the property to which it was of a character appropriate, it did not
need to be in the same ownership. Mr Hanson's son occupied the
farmhouse and the land for agricultural purposes and so the
farmhouse qualified for APR on Mr Hanson's death.
If this decision stands (the case is subject to an HMRC appeal)
the effect could be wide ranging. HMRC certainly believes that it
deals with an 'important point'. Consider a farmhouse that is
somewhat too grand for the 200 acres farmed with it. Hanson
suggests that the farmer could potentially rent another 400 acres
so that the farmhouse is then of a perfectly appropriate character
to a 600 acre agricultural unit. Alternatively, with careful
planning, it could be open for a farmer to gift all of his land to
his son (with 100% APR and CGT hold-over) but retain the farmhouse.
Provided the farmer continues to live in the farmhouse and (very
importantly) continues to farm the land he has given away (perhaps
via a tenancy arrangement) from the farmhouse, the farmhouse will
remain of a character appropriate for the purposes of APR on
death.
Finally, in the case of Golding (2011), the farmer, who was in
his 80s when he died, had farmed a 16 acre small holding in
Staffordshire for more than 65 years and lived in a small three
bedroom farmhouse which was in a very poor state of repair.
Initially, he had farmed the land intensively, but in later years,
he cut back his farming activities so that most of his produce was
for his own consumption and he only made very small profits each
year. HMRC argued that the farmhouse was not 'character
appropriate' on the grounds that the farm was not financially
viable and was not producing enough income to maintain the house.
HMRC argued that APR is aimed at preserving farming businesses and
should only be available if, after death, the farmhouse would
continue to be a working farmhouse which in this case was
unlikely.
The FTTT did not agree with HMRC and instead said that it is
necessary to take account of a number of different factors when
deciding whether the farmhouse is of a character appropriate rather
than just focusing on the profitability of the farm. The FTTT
concluded that, taking account of Mr Golding's age, the fact that
he did not do much farming any more or make much profit was not
relevant. It was sufficient that Mr Golding tended chickens and
sold eggs at the farm gate. Apparently the farmhouse itself was
also stuffed full with crates of apples in storage. This is another
important victory for the taxpayer and HMRC have until mid-July to
lodge an appeal, although it is anticipated they will not do
so.
All of these recent cases demonstrate that ultimately it is the
evidence of agricultural activity and agricultural occupation that
is the key. It was noted in the Atkinson appeal how the taxpaying
partnership had not shown evidence of any other agricultural use of
the cottage after Mr Atkinson moved to a care-home. Careful
record-keeping, notes of discussions, minutes, photos of meetings
and any other evidence to demonstrate agricultural use can all
assist and should not be underestimated.
This article by Hayden Bailey first appeared in CLA Land and
Business in July 2012