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ADRIAN BAIRD of Country Land and Business Association discusses two recent inheritance tax cases on farmhouses. THIS ARTICLE CONCERNS inheritance tax agricultural property relief and its application to farmhouses; and the agricultural value of farmhouses (which is the value on which that relief is given).
ADRIAN BAIRD of Country Land and Business Association discusses two recent inheritance tax cases on farmhouses. THIS ARTICLE CONCERNS inheritance tax agricultural property relief and its application to farmhouses; and the agricultural value of farmhouses (which is the value on which that relief is given). In order for a dwelling house to qualify for agricultural property relief as a farmhouse, it must be agricultural property. The Inheritance Tax Act 1984 defines agricultural property as agricultural land or pasture, but extends it, inter alia, to '... such farmhouses, together with the land occupied with them, as are of a character appropriate to the property ...' (emphasis added). Determining whether a particular dwelling house is a farmhouse and whether it satisfies the 'character appropriate' test has been a long-standing difficulty that has existed ever since the current agricultural property relief legislation was first introduced in 1981. On 17 October 2002 two decisions of the Special Commissioners were delivered that are very helpful for the purposes of judging whether a dwelling house will qualify for this relief.
A factual summary of the two cases
The Higginson case (SpC 337) concerned a property known as Ballyward Lodge, set in a landed estate comprising 134 acres (63 acres of agricultural land - mostly grassland; 3 acres of formal gardens, and 68 acres of woodland and wetland surrounding a lake). There were sundry outbuildings used for agricultural purposes, some forming two sides of a yard immediately behind the lodge. In evidence it was accepted that Ballyward Lodge was not a typical farmhouse. It was originally an early nineteenth century hunting lodge with a spacious hall; a drawing room; a library; a dining room; a kitchen; a sitting room, bedroom and bathroom for a domestic servant; five bedrooms (three with en suite bathrooms and a further bathroom shared by two bedrooms); and a further large room at the top of the house. It was further accepted that Ballyward Lodge was '... not the style of house in which a typical farmer would live ...'. It was described in the sales particulars occurring shortly after the date of the transfer when agricultural property relief was claimed as having '... enormous potential as a charming family home or as a small active farm ...'. The deceased had farmed the estate as a mixed farm (cattle, sheep, pigs and poultry) until 1985. From 1985 until his death in November 2000 the farmland was let on conacre terms (these being the letting by a tenant for the season of a small portion of land ready prepared for a crop). In 1993 a covenant was entered into with the National Trust which imposed restrictions affecting substantially the whole of the estate. In evidence it was also stated that the heir, the deceased's nephew, had drawn up a business plan and forecast for the estate in which the farming figures suggested that '... the profitability of the farm ... would seem marginal, at best ...'. Accordingly, the nephew sold the estate for £1.15 million in 2001.
126 acre estate
The other case was Antrobus (SpC 336). This concerned a property known as Cookhill Priory. The estate comprised this property with 126 acres of freehold land and 6.54 acres of tenanted land (all of which was agricultural land or pasture). Cookhill Priory itself was a Grade II property of a curious nature. It comprised a Tudor house, a chapel, and 'Georgian' additions. The east side was of Tudor origin (timber frame with brick infill and pitched roof). The north side was the northern wall of the chapel (part of which dated back to 1260 - though the chapel building itself was a farm building because the pews had been taken out in the 1950s and had since then been used for storing logs, potatoes, animal foodstuffs, agricultural equipment and had also been used for sheep shearing). The west side of the house was made up of two extensions made in 1765 and 1910 in the 'Georgian' style, with a parapet. Two drives led to the property: one to the 'grander' front door (rarely used) on the 'Georgian' side, and the other to the east side to a concrete apron forming the farmyard which was surrounded by other farm buildings and outbuildings. The gardens of the house were described as '... not considerable or important ...'. Surrounding the house on the sales particulars were said to be '... areas of parkland with trees and five pools ...' - though the Commissioner on examining photographic evidence suggested that '... the areas of parkland appear to include a number of the corrugated iron agricultural buildings and the pools could be better described as farm ponds ...'. In evidence from the deceased's accountant, Cookhill Priory was used just as any other farm building. Miss Antrobus after 1991 ran a business of keeping a small flock (about 40 ewes); selling lambs and wool; and about 80 to 100 fattening cattle. Her turnover varied from £13,000 in 1999 to £39,000 in 1993; her profit (including the sale of eggs, potatoes, cabbage and geese) varied from a loss of £51,000 in 1998 to a profit of just under £7,000 in 1994. Further evidence was presented from an expert witness who had viewed 27 comparable properties in the locality. The expert concluded that '... the accommodation of the dwelling house at Cookhill Priory was consistent with other farmhouses occupied with similar amounts of agricultural land and that the interior was typical of a farmhouse ...'.
The decision in the two cases
Higginson was a victory for the Revenue; Antrobus was a victory for the taxpayer.
The reasons given for the decision
In Higginson, the Commissioner suggested that the definition of agricultural property was to give relief only to a unit that was an agricultural unit. The Commissioner suggested that this meant that the land must predominate. The Commissioner suggested the most significant fact in the case was the price the estate was sold for soon after the death, giving rise to the transfer. He then concluded: In a further, very important observation, the Commissioner in Higginson suggested that Ballyward Lodge was not a farmhouse within the meaning of agricultural property '... irrespective of the concluding words ...' - i.e. that it was not a 'farmhouse' per se and hence automatically could not be a farmhouse of a character appropriate to the property. In making this observation, the Commissioner made great play of a quote of Lord Upjohn in an income tax case, Korner and others v Commissioners of Inland Revenue 45 TC 287, that a farmhouse should be '... judged in accordance with ordinary ideas of what is appropriate in size, content and layout, taken in conjunction with the farm buildings and the particular area of farmland being farmed, and not part of a rich man's considerable residence ...'. The Commissioner suggested that Lord Upjohn's quote indicated what was meant by the term 'farmhouse' within the definition of agricultural property. The Commissioner in Higginson commented on the meaning of agricultural value in a passage that was clearly obiter and which the Commissioner himself described as 'academic'. Nevertheless, the Commissioner's observation is so at odds with current Inland Revenue practice that it is worth quoting in full. The Commissioner said: '... A property may command a high price in the open market because of potential for development; and [section 115, Inheritance Tax Act 1984] subsection (3) clearly caters for that situation. But it seems to me that the notional restrictive covenant would have much less of a depreciatory effect in a case where the property has a value greater than ordinary, not because of development potential but rather because of what I might call "vanity value" on account of its site, style or the like ...'. In Antrobus, the Commissioner did not have to consider whether the property was a farmhouse (as this was admitted by the Revenue). Consequently, the Antrobus decision is entirely concentrated on what is necessary for a farmhouse to satisfy the character appropriate test. The Commissioner suggested that this test could be judged according to five principles, some of which had several facets. These five principles were as follows.
The Korner test
Consider whether the house is appropriate by reference to its size, content and layout, with the farm buildings and the particular area of farmland being farmed. This has two facets:
(i) The history of the property (judged in this case by the evidence of the accountant that the deceased was a farmer in every sense and that the use of the house was '... not ... as a family home of distinction but as a working farm building ...').
(ii) The comparable evidence (the expert evidence submitted that Cookhill Priory was comparable with '... many other farmhouses within a wide area ...' was crucial, as was the photographic evidence).
The Starke test
The test from Starke v Commissioners of Inland Revenue in the High Court decision [1994] STC 295, that the farmhouse is proportionate in size and nature to the requirements of the farming activities conducted on the agricultural land or pasture in question, has four facets:
(i) That the house be a 'farmhouse', i.e. the place from which the farming activities are conducted, subject to the possibility that (via Korner) the house metamorphoses into something altogether more grand. In Antrobus this was not contested by the Revenue.
(ii) That the house was historically the farmhouse connected to the agricultural land or pasture in question (in Antrobus there was evidence that this had been the case for almost 100 years).
(iii) That there was a farming business, even if this was not financially successful. (In judging this, the accountant's evidence that farming profits had declined in recent years was relevant. The Commissioner noted that the comparable evidence of farming activities of a similar nature being conducted on similar holdings was also relevant.)
(iv) Profitability (although in Antrobus there was little evidence of profitability, the Commissioner commented that '... profitability cannot be a conclusive factor).
The 'elephant test'
Although it may not be possible to describe a farmhouse which satisfies the character appropriate test, the principle is that you will know one when you see it. This has no further facets. In Antrobus the expert evidence that this 'elephant test' was satisfied was accepted.
The rural Clapham omnibus test
Would the educated rural layman regard the property as a house with land or a farm? This had two facets:
(i) The expert evidence as submitted (which in Antrobus suggested this principle was satisfied).
(ii) Photographic evidence.
The historical dimension
How long has the house in question been associated with the agricultural property and is there a history of agricultural production? This has no further facets. In Antrobus this principle was established for nearly 100 years.
Lessons for the future
These two decisions are of particular interest. It may prove to be too simplistic to view Higginson as a decision where the taxpayer failed because the house was simply not a 'farmhouse', i.e. such that the five principles in Antrobus had no relevance (as they follow from the finding that the house in question is a 'farmhouse'). Whereas the Commissioner in Higginson suggests that his ratio was Ballyward Lodge was not a 'farmhouse' (he actually states this), there is a cautionary quote in Antrobus that opens upon a line of argument that Higginson would have failed the character appropriate test because of the first principle in Antrobus. The following quote from Antrobus is instructive in this respect.
'[Lord Upjohn's words in Korner] are relevant to the definition of a farmhouse and not to the question at issue in this appeal, which is whether the farmhouse is of a character appropriate to the property ...'
This supports the narrow interpretation of Higginson, but Dr Brice, the Commissioner in Antrobus, goes on to caution '... the principle that a farmhouse "must be judged in accordance with ordinary ideas of what is appropriate in size, content and layout, taken in conjunction with the farm buildings and the particular area of farmland being farmed" does encapsulate the idea that it must be of a character appropriate to the property ...' (emphasis added). The obiter in Higginson on the meaning of agricultural value may prove to go a step too far. It is understood that Antrobus may proceed to the Lands Tribunal for a decision on what is the agricultural value of Cookhill Priory, and that body may take a different, and more authoritative, view of the meaning of agricultural value. Nevertheless, the observation that agricultural value may include 'vanity value', because those hypothetical farms making bids for the property prefer better farmhouses, is useful and will cause the Valuation Office Agency to rethink the principles it employs when advising Inland Revenue Capital Taxes Office. The five 'principles' in Antrobus are very helpful. The decision is the most detailed to date on the character test. What Antrobus emphasised is the power of expert evidence in passing through the five 'principles' - the evidence was crucial to passing through the first four. Furthermore, preparatory work here clearly pays dividends. The detail of the comparable evidence in Antrobus was clearly very persuasive.
