Agricultural Property Relief: Don’t Take It For Granted

Introduction

Agricultural property relief (APR) provides a hugely valuable relief from inheritance tax for land used for agriculture.

As such the securing and preservation of the availability of the relief is central to inheritance tax and estate planning for farms and other rural businesses.

The relief may also apply to farmhouses, cottages and other buildings used in conjunction with the land.

Agriculture includes horticulture, growing fruit and the intensive reader of livestock and fish for human consumptions.

The relief potentially applies to land farmed ‘in hand’ by the owner as well as land farmed by a tenant. To qualify the land must have been occupied by the owner for the purposes of agriculture for two years or owned by him for seven years and occupied by someone else for the purposes of agriculture throughout that period.

Relief also extends to shares and securities if agricultural property forms part of the company’s assets and part of the value of the shares or securities can be attributed to the agricultural value of the agricultural property.

The rate of relief

Where the relief is available the rate applying will be 50% or 100%.

The rate is 100% where:

  1. The transferor has vacant possession or the right to obtain vacant possession within the next 12 months;
  2. The property is let on a tenancy which commenced after 31 August 1995; or
  3. The transferor has owned his interest in tenanted land since before 10 March 1981 and certain other conditions are met.

In all other cases the agricultural value is reduced by 50%.

Problem areas

HMRC closely scrutinises claims for APR and there are myriad potential pitfalls of which potential claimants should be aware.

I outline five of the most common areas where problems can arise and claims can fail.

1. Farmhouses and farm cottages

To satisfy the definition of ‘agricultural property’, any farmhouses, cottages and outbuildings included in a claim for APR must be of ‘a character appropriate to the property’ (s115(2) IHTA 1984).

The meaning of ‘character appropriate’ has been considered in a number of tax cases and based on those cases HMRC consider the main factors to be applied in determining whether a farmhouse is of a character appropriate to be:

  • Is the farmhouse appropriate by reference to its size, layout and content with the farm buildings and the particular area of farmland being farmed?
  • Is the farmhouse proportionate in size and nature to the requirements of the agricultural activities conducted on the agricultural land?
  • Within the agricultural land does the land predominate so that the farmhouse is ancillary to the land?
  • Would a reasonable and informed person regard the property simply as a house with land or as a farmhouse?
  • Applying the “elephant test”, would you recognise this as a farmhouse if you saw it?
  • How long has the farmhouse and agricultural property been associated and is there a history of agricultural production?
  • There must be some connection or nexus between “such cottages, farm buildings and farmhouses, together with the land occupied with them” and the property to which they must be of a character appropriate.

(IHTM24051)

A further likely point for scrutiny by HMRC in considering a claim for APR on a farmhouse is where the farming business is controlled from: is it from the farmhouse, a farm office or a managing agent’s office elsewhere? The answer may be crucial to the availability of APR.

This point in terms of the control and management of the farming business can give rise to a further area of concern for older farmers as HMRC may well regard the farmhouse as a home for retirement than the centre of operations of a farming business.

2. Diversification issues

Farmers are typically under pressure to generate alternative forms of income.

While new ventures may generate welcome income, they may also generate significant problems from an inheritance tax perspective.

Liveries, caravan sites, farm buildings converted to holiday cottages, and land used for renewable energy projects like wind turbines and solar panels are likely to result in the loss of APR, though careful structuring of the new ventures may ensure that business property relief is available instead.

These issues are particularly acute where the land is not farmed in-hand, e.g. if it is subject to a Farm Business Tenancy and the tenant undertakes activities that result in the land no longer being occupied for the purpose of agriculture since business property relief will certainly not be available in those instances.

3. Development value

APR is restricted to the agricultural value of the property. That is, the value of the property if subject to planning restrictions permitting it to be used only for agriculture.

Often the open market value will exceed the agricultural value, the difference depending among other things on the location and amenity value of the property. Despite HMRC’s occasional insistence otherwise, there is no standard discount to apply in determining the agricultural value.

A further disparity may arise where the value has significant ‘hope value’ reflecting its development potential. The open market value of land with planning permission is likely to be significantly greater than the agricultural value.

In instances where the land is farmed in-hand, then business property relief should be available to cover the difference between the agricultural value of the land and its open market value; however, if the APR is claimed in respect of tenanted land, then no BPR would be available and the hope value would fall within the estate for inheritance tax purposes. Other planning would therefore need to be considered in these cases.

4. Horses

While keeping horses for farm work may be related to agriculture and therefore land used for grazing them should qualify for APR, the grazing horses for recreational riding is not agricultural. The key is that there must be a link to agriculture.

The IHT legislation extends the meaning of agriculture to include the breeding and rearing of horses and therefore stud farms should qualify (though HMRC might challenge the availability of the relief based on lack of commerciality).

Note that where horses are grazed in connection with a livery business, business property relief may be available instead, as confirmed in the recent First Tier Tax Tribunal decision in The Estate of Vigne Deceased v HMRC [2017] UK FTT 632.

5. Derelict buildings

APR extends to buildings occupied for the purposes of agriculture such as farm outbuildings.

Derelict farm buildings and structures are unlikely to be ‘occupied for the purposes of agriculture’ and therefore will not qualify for APR.

Similarly, buildings that while part of the farm are unused will not qualify. HMRC provide the example of land let for mowing/grazing and yet there are extensive farm buildings, it may be the case that not all the buildings were occupied for agricultural purposes and therefore relief would not be available.

Problems can also arise if the farmhouse is unoccupied at the point that a charge to inheritance tax arises and therefore is not ‘occupied for the purpose of agriculture’.

Conclusion

Claims for APR continue to be scrutinised closely by HMRC and is therefore the availability of the relief should not be taken as a certainty.

It is important that matters are kept under regular review including the interaction with business property relief.

 

This article was in published in our June 2018 enewsletter.  To be added to our mailing list, click here and submit your contact details on our sign up form.

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