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.

Atkinson case: Inheritance Tax Agricultural Property Appeal Report published

The Upper Tribunal (Tax and Chancery) has now published its report on the Atkinson case, mentioned briefly here at the end of last week. 

The case hinged around the question of whether the late Mr Atkinson’s bungalow had been ‘occupied for the purposes of agriculture’, as required by s117 of the Inheritance Tax Act in the seven years required before his death.  From the case report it is clear that Mr Atkinson acquired Abbotson Farm near Kirkby Lonsdale in Lancashire in 1957, a holding of 195 acres.  By the time of his death, the farming was undertaken by a partnership consisting of Mr Atkinson himself, his son, daughter-in-law and grandson.  The partnership had a tenancy of the holding from Mr Atkinson himself, and it was accepted that the tenancy was a partnership asset.

Sadly in 2002 Mr Atkinson became very ill and after a short stay in hospital he went to live in a care home.  He died on 20 October 2006.  His bungalow was by this time a part of the tenancy agreement, and the partnership maintained the bungalow as Mr Atkinson had last lived in it.  His furniture and possessions stayed there, and two of the partners visited the property every week to look after it, collect post and so on.  Exemption from Council Tax was however claimed, on the grounds that the bungalow was no longer occupied.

Section 117 of the Inheritance Tax Act means that ‘agricultural property’ must be ‘occupied for the purposes of agriculture’ in a stated period before death.  The period is only two years in the case of owner-occupied property, or where there is a right to possession within a short time; but it is seven years in the case of let property.  The seven year requirement applied here.  The benefit of a successful claim for Agricultural Property Relief is that 50% or 100% relief can be claimed on the Agricultural Value of the asset in the deceased’s estate on death.  The saving in IHT is therefore substantial on an estate which is otherwise taxed at the 40% death rate of IHT, even where the agricultural value of the asset concerned may be less than its market value.

The purpose of the Upper Tribunal is to deal with appeals against the decisions of the First Tier Tax Tribunal.  The lower Tribunal had previously decided in favour of the executors’ claim that the bungalow was indeed occupied, by the partnership, for the purposes of agriculture.  In reviewing this decision the Upper Tribunal has come to the opposite conclusion.  In particular it has highlighted:

  • The need to find an objective connection between the occupation of the bungalow and relevant agricultural activities;
  • Relevant agricultural activity can be considered broadly, eg a book-keeper employed in a farm business can be regarded as engaged in agricultural activity;
  • Vacating a property does not necessarily mean it is no longer occupied.  Various possibilities are reviewed: the occupier away on holiday; the family of a retired or deceased worker; accommodation awaiting the arrival of a new employee; the empty farm building following a change of enterprise.

The lower tribunal had regarded the partnership’s occupation under the tenancy as important, but the upper tribunal was dismissive of this view – it had been Mr Atkinson who was in occupation.  Their conclusion was that he ceased to occupy the bungalow for the purposes of agriculture when he moved to the care home with no reasonable prospect of ever returning home, even assuming that he continued to play a significant role in the partnership after that time.

In reviewing the lower decision the Upper Tribunal has accepted that Mr Atkinson continued to occupy the bungalow, but not as a dwelling and not for the purposes of agriculture.  The correct approach is to look at the questions of occupation and the purposes of agriculture together as two linked questions.  In the words of the judgment:

“The correct approach is to identify what does and what does not amount to a sufficient connection between the use and occupation of the property … and the agricultural activities being carried out on the agricultural property …; and to ask whether the facts give rise to a sufficient connection.”

The facts in this case did not establish a sufficient connection: the bungalow had not been occupied for the purposes of agriculture since it had become clear that Mr Atkinson would never return there to live, despite the occasional attendance of two of the partners in the business and the fact that his belongings and furniture remained in the bungalow.

Finally it should be added that the respondent executors chose not be represented in this appeal because of understandable concerns over costs.  The two judges who dealt with the case do however, seem to have gone to particular trouble to consider a submission made on their behalf in arriving at their judgment.  There is now a short period in which the decision can be subject to a further appeal, but this now seems unlikely.

The case report itself can be seen here, and the comments above are entirely based on that report.   The Upper Tribunal does not appear to have finalised the case reference yet, as it appears at [2011]UTUK xxx (TCC).

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.