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Forever occupied with inheritance tax

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.

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