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I am a trustee of a discretionary trust which was set up in 1990. The beneficiaries are three brothers and their families. The trust owns twenty acres of agricultural land which is rented to a farmer for summer grazing. The farmer is responsible for repairing fences, etc.
There is a possibility that the land may be zoned for housing within the next couple of years. If the disposal of the land is in 2004, then the taper relief within the trust will be 25 per cent, giving a tax rate of 25.5 per cent.
I am a trustee of a discretionary trust which was set up in 1990. The beneficiaries are three brothers and their families. The trust owns twenty acres of agricultural land which is rented to a farmer for summer grazing. The farmer is responsible for repairing fences, etc.
There is a possibility that the land may be zoned for housing within the next couple of years. If the disposal of the land is in 2004, then the taper relief within the trust will be 25 per cent, giving a tax rate of 25.5 per cent.
Alternatively the land could be distributed out of the trust to the brothers who will then farm it to get the higher taper relief available for business assets.
For the land to be treated as a business asset, what farming activities would be necessary? Is it sufficient for the brothers to hire contractors to fertilise the land, deal with fence repairs, etc. and then arrange for a farmer to pay a fixed amount for cutting the grass for silage and also rent the field out for sheep wintering? Or would greater farming activities be required?
(Query T15,913) – Reluctant farmer.
'Reluctant farmer' is clearly hoping to rely on the Scots case, Commissioners of Inland Revenue v Forsyth-Grant [1925] 25 TC 369, which was preceded by McKenna v Herlihy 7 TC 620, and Donald v Thomson [1922] 8 TC 272.
The English equivalent is a profit a prendre of pasturage. This has been considerably in use for inheritance tax planning purposes. It would certainly be necessary for the brothers to be responsible for fertilisation and repairs, albeit through contractors (using the farmer would not be a good idea). It would also be desirable for them to retain responsibility for cutting the grass and selling it for silage. Inland Revenue Capital Taxes Office takes this point and its position is supportable by Mitchell v Commissioners of Inland Revenue 25 TC 380, where the owner subcontracted thistle control. There is, however, a risk in going down this route since there must be some prospect of an inheritance tax test case on the agricultural property relief issue.
Under section 832(1), Taxes Act 1988, farming consists of the occupation of land for the purposes of husbandry. It would therefore be better for the brothers to form a partnership and buy some cattle. Arranging for an adjoining farmer to 'winter' his cattle on the land might tempt the Inspector of Taxes to argue that continuous trading had not been carried out on the land with the result that there was no whole year capable of qualifying for business asset treatment.
Multiple ownership also creates its problems in the absence of an operative partnership being in place. Before 1997, Bull v Bull [1955] 1 QB 234 provided that each co-owner in possession was in partial possession of the whole. The Trusts of Land and Appointment of Trustees Act 1996 changed this situation; in order to ascertain whether this would be the case, one would have to look into the history of the trust and apply the criteria set out in sections 12(1)(a) and 13(2)(a) and (4)(b) of that Act.
If, as is probably unlikely, 2004 could be reckoned to be a firm date for the obtaining of planning consent, then, if a neighbouring farmer could be found who operated through an unlisted trading company, it would be better for that company to be granted a farm business tenancy to expire at the relevant date. This would constitute a business asset by reason of paragraphs 5(2)(b) and 6(1)(b)(i) of Schedule A1 to the Taxation of Chargeable Gains Act 1992. If 2004 is purely a speculative date, then it needs to be taken on board that, if the farm business tenancy is allowed to run on, a full year's notice to expire on an anniversary date will be required to obtain vacant possession of the land.
Such a tenancy could, indeed, be granted before the appointment to the brothers so as to obtain hold-over relief under section 260(2)(a), Taxation of Chargeable Gains Act 1992. If the brothers were to trade, it would be better to let them into possession before appointing the land, in which case the hold-over would be under paragraph 1 of Schedule 7, which would cover hope, as well as agricultural, value, in circumstances in which the view might be taken that letting them into possession created an interest in possession in circumstances analogous to Statement of Practice SP10/79.
The price of the brothers being able to claim business asset taper giving rise to tax at 10 per cent of the held-over gain after two full years of ownership under the Chancellor's new proposals will be the payment of an inheritance tax exit charge under section 69, Inheritance Tax Act 1984. Bearing in mind that the first periodic charge has taken place recently, one is talking of a smallish sum because the 6 per cent maximum will be reduced under the 1/40 per quarter since the tenth anniversary.
Nonetheless, the value of the land could be substantial and the bulk of its value will not qualify for agricultural property relief by reason of section 115(3), Inheritance Tax Act 1984. It seems clear from the fact that the grazing has only been rented out on a summer basis, that section 116(2)(c) will have given 100 per cent relief on the agricultural value if a grazier is still in possession or a corporate replacement has been found. If the brothers are allowed into possession in order to farm in partnership, the terms must be such as to enable the trustees to oust them within 12 months in order to qualify for the equivalent relief under section 116(2)(a). – WJdeS.
There are two parts to this query. First, how does a person become a farmer on land used for grazing? Secondly, if farming can be established, how can the higher, business asset, rate of taper relief apply to the anticipated disposal?
'Farm land' is defined in section 832(1), Taxes Act 1988 as '… land in the United Kingdom wholly or mainly occupied for the purposes of husbandry …; "farming" shall be construed accordingly …'. Thus, 'farming' means the occupation of land wholly or mainly for the purposes of husbandry. The approach of the courts (in Back v Daniels 9 TC 183 and Dawson v Counsell 22 TC 149) has been to determine the paramount use to which the land in question is put and then to ascertain the identity of the person who had that use (either to the exclusion of others or as paramount user). The identified person is then regarded as the occupier and if the purposes of his occupation (i.e. the paramount use to which the land is put) is husbandry, then that person will be farming the land.
Where a landowner has granted seasonal grazing rights, the courts have been prepared to accept that the landowner remains the paramount occupier (see, for example, Lord Keith in Drummond v Commissioners of Inland Revenue 32 TC 263, where at page 274 he states '… I must take it that a right of seasonal grazing does not infer a right of occupancy …'). Further, where land is subject to seasonal grazing, performance by the owner of activities of maintenance of boundaries, fertilising, weeding and seeding the land are husbandry (see, for example, Commissioners of Inland Revenue v Forsyth-Grant 25 TC 369 and Mitchell v Commissioners of Inland Revenue 25 TC 380).
'Reluctant farmer' states that the '… land … is rented to a farmer … [who] is responsible for repairing fences …'. Clearly, if the agreement under which rents are received amounts to a tenancy, then the tenant must be the occupier and only the tenant could be farming the land. It would, however, be possible to have an agreement under which someone is granted pasturage rights – i.e. the right to bring animals on to the land to graze the land. In such circumstances the landowner may remain the occupier and, in order for him to be farming the land, he needs to perform the acts of husbandry – i.e. seeding, weeding and fertilising the land and maintaining the boundaries – that are the commensurate acts of husbandry. It may be that those acts of husbandry are physically performed by another person acting as agent for the landowner, in which case it would be important for there to be a separate contractual arrangement to the pasturage agreement.
The higher rate of taper relief for business assets can be granted on the disposal by a landlord where the let property is in use for the purposes of a trade carried on by an unlisted trading company (see paragraph 5(3)(c) of Schedule A1 to the Taxation of Chargeable Gains Act 1992). Thus, if the land is let by the trustees in this case and the tenant is an unlisted trading company, then the higher rate of business asset taper would apply for periods of ownership since 6 April 2000 that fell within the relevant period for the purposes of taper relief. It is more likely, however, that the grazier here is not an unlisted trading company, but an individual. In these circumstances, the trustees would need to ensure that the grazing agreement did not amount to a tenancy but was rather a pasturage agreement and that they, or their agents, were responsible for the acts of husbandry associated with growing a crop of grass.
Given that development is assumed to arise in 2004, it may be worthwhile transferring the ownership of the land to the brothers (provided they then become farmers), because following the Chancellor's statement on 18 June 2001, it is anticipated that only two years of ownership will be necessary from 6 April 2002 for a business asset to qualify for the maximum, 75 per cent, rate of taper. Such a transfer would avoid the apportionment calculations that would otherwise arise on the assumption that the trustees have not hithertofore been farmers, but now become farmers – i.e. the apportionments required where an asset has been both a business and non-business asset during the relevant period for taper relief purposes. – Belgravia.
Extract from reply by 'Hodgy':
It is assumed that the payments for the grass lets will be for lettings each covering a period of 364 days or less and, on that basis, the querist should refer to the Inspector's Manual at paragraph IM2256. This confirms the Inland Revenue's acceptance that such short-term grazing lets constitute a trade of farming. This is in line with the case of Commissioners of Inland Revenue v Forsyth-Grant 25 TC 369.
Although not directly related, a worrying attitude is demonstrated by the Capital Taxes Office in its General Examination Manual at reference 25.18 dealing with agricultural property relief. This suggests that the letting of land for grazing is not a business and it also expresses the opinion that a farm with an acreage 'of less than, say, 20 acres' is not a business. This is mentioned because the acreage in question is 20 acres.
It is difficult to envisage how such a crude rule of thumb could be supported but, given the large amounts of tax at stake, the Inland Revenue might seek to press unexpected arguments. However, it is suggested that such arguments would fail.
