Inheritance Tax: Agricultural Property Relief should look ahead not behind

Should Inheritance Tax distinguish between the deserving rich and the undeserving rich?  A smart farmhouse and a few hundred acres make an attractive investment and a comfortable home.  Excellent capital growth offers a comfortable shelter from Inheritance Tax, and annual revenue returns at 2 or 3% pa compare well with other investment opportunities.  Add capital growth, and you have the prospect of 7% or more.  Own enough rural land and 14% annual return should not be beyond your reach.  What’s more you can enjoy all the privilege, status and privacy of a country life.

So why does this very attractive opportunity for the super-wealthy enjoy the protection of its own special relief, Agricultural Property Relief (APR)?  As if that’s not enough, if you structure it right anything not covered by APR will be dealt with by Business Property Relief (BPR).  APR provides up to 100% relief on the agricultural value of farmland including buildings, cottages and farmhouses.  BPR at 100% can go a long way to deal with the rest.

Now imagine a lifetime of toil.  Constantly on call to deal with late night calvings, up early again to milk the cows, long hours at harvest time, animal health worries, bovine tuberculosis, badger culls, the mindless bureaucracy of the Common Agricultural Policy, the weather, difficult harvest conditions, world price of grain, constant price and quality pressures from the supermarkets.  Land price inflation is all very well, but it’s not cash until you sell up and move on.  Meanwhile you have upwards of £10,000 per acre invested in land, stock, machinery and stores, all for an annual income after feed, seed, fertiliser, labour, machinery of no more than £100 to £200.  Or if you are a dairy farmer, selling milk for 25p/litre which costs you upwards of 29p/litre to produce.

On the one hand, Agricultural Property Relief looks like a tax relief scandalously open to abuse by the uber-rich.  On the other, it can also look like a well-deserved thank-you for unstinting efforts to maintain a domestic food supply.

But both views miss the point of Agricultural Property Relief.  The relief recognises that farming is a long-term, low-return, high-capital business vital to national security and self-reliance because we all need to eat and it’s better if our food doesn’t have to travel too far before we eat it.  So it is intended to be neither a haven for the wealthy or a thank you to hard working farmers.  It is meant to ensure that farm businesses do not have to be disrupted on inheritance by selling off vital assets like land or livestock to pay the tax bill.  Otherwise a business earning a return on capital of no more than 2% a year, will take 20 years’ profits to pay the tax bill, and by then it is nearly time for the next generation to die.

We need to rethink Agricultural Property Relief.  Instead of looking back, we should look forward.  Make the relief conditional, repayable if land or other property is sold within say 30 years without an equivalent replacement.  The only point to the relief is to protect capital invested in farming, continually dedicated to feeding a growing population.  That way we really could distinguish between the deserving and the undeserving rich.


Latest on Atkinson IHT Farmhouse Case: HMRC appeal successful

News is emerging that HMRC”s appeal in the Atkinson case has been successful.

The First Tier Tax Tribunal decided last year in favour of a claim for Agricultural Property Relief on a farm bungalow.  The property had been empty for some time – four years – because its occupier, a partner in the farming business, had gone to live in care. 

The Upper Tier Tax Tribunal has now reviewed this decision and come to the opposite conclusion.  The crux of the case seems to be the need to seek a sufficient connection between the use and occupation of the bungalow on the one hand, and the agricultural activity on the agricultural property over which relief from Inheritance Tax is claimed on the other.  Do the facts give rise to a sufficient connection?  In Atkinson the judges have decided it does not – the official report should be available soon, which should allow us to analyse this decision more closely.

Watch this space for further comment.

Annual Rural Tax Book now available for 2011/12 taxes

CONCISE RURAL TAXATION (formerly TAXATION FOR STUDENTS OF RURAL LAND MANAGEMENT) is an annual publication, which now commands a wide following amongst rural chartered surveyors, land managers, agricultural valuers and those studying for the profession.  The Order form is available from:

or by clicking this link: Taxbook Order Form

Or a copy can be purchased by simply sending a cheque for £20, payable to Harper Adams University College, addressed to:

Rita Wilkinson, Harper Adams University College, Newport, Shropshire TF10 8NB

There is a special discounted rate for students, RICS APC candidates and CAAV exam candidates of £15.

CONCISE RURAL TAXATION originated as a series of notes for second year students on the BSc Honours Degree in Rural Enterprise and Land Management at Harper Adams University College, to accompany their lectures and tutorials.  Over the years the original series of notes has grown and developed, and more and more former students and others have asked to be able to buy an up-to-date copy as they have prepared for the professional examinations of the Royal Institution of Chartered Surveyors, and the Central Association of Agricultural Valuers.  This year’s change of title reflects the broader interest in this annual rural tax update.  The following taxes are covered:

• Income Tax, including Business Profits, Annual Investment Allowance, new treatment of cars based on exhaust emissions, the herd basis and valuations for income tax purposes, profit averaging for farmers, loss relief and next year’s further changes to Capital Allowances with an extended section on Short Life Asset treatment.
• Capital Gains Tax – including Entrepreneurs’ Relief and the two sets of changes in 2010
• Inheritance Tax
• Trusts and Settlements – including Mainstream Trusts under the Finance Act 2006
• Value Added Tax, farming and the rural estate, partial exemption, the de minimis rules and the introduction of alternative de minimis tests in 2010
• A chapter deals with a number of specific tax issues for rural land managers, including valuations, land compensation and taxation, the principal residence exemption from CGT, Single Payment Scheme, Pre-Owned Asset Tax, lease premiums, SDLT and the tax implications of letting land.   New for this year: the latest treatment of Furnished Holiday Lettings.
• An introductory chapter also deals with the administration of national taxation in the United Kingdom and the final chapter highlights reliable sources of tax information on the internet.

120 pages
Published October 2011

Golding Holding Farmhouse Tax Victory will not be appealed by HMRC

MFG Solicitors have announced that HM Revenue and Customs are now out of time to lodge an appeal against the Golding case.  The Tribunal Report makes interesting reading, and it’s available on the internet (link below).  The following comments are based on the tribunal report.  This was the case of a farmhouse on a 16 acre smallholding near Lichfield.  Despite the lack of extensive agricultural activity on the holding in the years before Mr Golding’s death, the First Tier Tax Tribunal agreed that the farmhouse was of an appropriate character to the holding, and therefore eligible for Agricultural Property Relief (APR).  This means that the value of the house will be substantially free of Inheritance Tax as the relief in this case will be 100% of the property’s Agricultural Value.

Alan Neal, the lawyer who successfully led the case on behalf of Mr Golding’s executors, said “It’s no secret that the Revenue were anxious to win this case and the successful outcome has definitely torpedoed their endeavours to deny more farming families tax relief.”

The case will now be quoted widely in claims for Agricultural Property Relief, especially in cases involving small farms where the farmer had no other obvious source of income, for elderly farmers who were still continuing farming albeit on a much reduced scale and for smaller farmhouses.  It probably won’t do much for the prospects of APR on grand ‘Gentleman’s Residences’ on small or large blocks of land, where the ‘farmer’ is demonstrably gainfully-employed elsewhere.  The case also continues a worrying trend that seems to suggest the worse the condition of a house, the more likely it is to be viewed as a farmhouse by the members of the tax tribunal.  See the earlier Antrobus case for similar comments by the Special Commissioner.  In this case, the Tribunal report seems to lay emphasis on the poor state of repair of the farmhouse and buildings, and the need of serious repair to the roof.  This leads the Tribunal to comment that, from the experts’ photographs, the dwelling would only be acceptable as a farmhouse, going on to say later in the report that a working farm is not expected to be finished to the so-called ‘higher’ standards of a domestic residence.  This raises the worrying question of whether a house in tip-top condition is therefore less likely to be regarded as a farmhouse.

Does the case set a strong precedent as the lawyers claim?  First Tier Tax Tribunal decisions do not set legal precedents, so future Tribunals are not bound to follow them.  And future cases which do go through to the higher courts could therefore overturn the reasoning in a decision like this one.

Secondly, there is another curious element in the Golding case.  A claim for Agricultural Property Relief on a farmhouse has a clear logical flow.  First there must be Agricultural Land, to which farmhouses (and other buildings) must be ancillary and of character appropriate.  There then remains the attribution of Agricultural Value to the Agricultural Property.

The argument in Golding was about whether the farmhouse was of character appropriate.  It was not argued at the Tribunal as to whether the house was a farmhouse at all within the definitions and earlier decided cases under the Inheritance Tax Act.  There was a last-minute attempt by HMRC to contest this point, and the Tribunal accepted that HMRC had already conceded it in much earlier correspondence.  At the very last minute (sometime between 24 February and 1 March 2011), HMRC’s counsel tried to re-raise this question, but was understandably prevented by the Tribunal from doing so at that late stage in proceedings.  The case report includes the observation that, if this case had been argued, the Tribunal would have determined that the house was indeed a farmhouse within the Inheritance Tax definition, although no specific evidence was taken on the issue.

So the Golding decision is likely to be helfpul to other claims for APR in similar circumstances, but it also seems that we may continue to see challenges to APR claims on the question of whether houses on farms qualify as farmhouses, in line with earlier cases like Rosser, and McKenna.

See this link for an earlier post on the Golding case, and this link for the full case report itself.

Farmhouses and Inheritance Tax: Elephant Test holds good for Golding

Savills Rural have circulated details of their success in Golding v HMRC.  Mr Golding, an elderly smallholder, farmed 16 acres near Lichfield.  Towards the end of his life he mainly grew food for his own consumption, although he continued to make modest profits from year to year.  He died in 2007 and the executors of his estate claimed Agricultural Property Relief on the smallholding as a way to reduce the Inheritance Tax Bill on the estate.  But the taxman did not agree.

The taxman did not dispute the eligibility of the land and buildings for the relief, but denied the claim for the house.  This was a small three bedroomed house in poor condition.  Their original argument was that the small house was not of ‘character appropriate’ to the smallholding.  Later on this was extended to a claim that it was not even a ‘farmhouse’.  The technicalities here are that a ‘farmhouse’ must be of ‘character appropriate’ to qualify for Agricultural Property Relief.  It must also be occupied ‘ancillary’ to agricultural land, and there is a minimum period of ownership as well (two years in a case like this).  The latter points were not however, in dispute in this case so the argument revolved around whether the dwelling was of ‘character appropriate’ to the 16 acres of land.

It seems from Savills’ description of the case that the main argument by the taxman was based on the limited financial viability of the holding.  Earlier cases however – notably Antrobus in which Savills’ Clive Beer and mfg solicitors also acted for the claimant – confirmed the broader basis of a claim for relief on a farmhouse.  A wide range of factors must be considered, including the size of the holding in relation to the house, cropping and stocking aspects, history of the holding and the so-called ‘elephant test’ – you know a farmhouse when you see it.  The Tax Tribunal seems to have accepted the broader argument.

The plight of the elderly farmer has been a growing concern in recent cases, and this case looks as if it will be notable for the Tribunal’s acknowledgement that as farmers grow older and their output drops, the reduced scale of the farm business does not on its own exclude Agricultural Property Relief.

It’s not time to party yet, as HMRC have until mid-July to appeal but the details of this case will be required reading once they become available on the Tax Tribunal’s website, in particular for the Tribunal’s detailed reasoning, the details of the case, the evidence and how the Tribunal dealt with it.