.png)
.png)
If a farming business is incorporated and the farming machinery and stock are transferred to the new company, but the farmhouse and land continue to be owned outside of the limited company, will this prejudice the agricultural property relief on the farmhouse? Also, will the new single farm payment scheme have any effects on the incorporation process?
Readers' views on these two aspects would be much appreciated.
Query T16,711 — Daisy.
If a farming business is incorporated and the farming machinery and stock are transferred to the new company, but the farmhouse and land continue to be owned outside of the limited company, will this prejudice the agricultural property relief on the farmhouse? Also, will the new single farm payment scheme have any effects on the incorporation process?
Readers' views on these two aspects would be much appreciated.
Query T16,711 — Daisy.
Reply by JdeS:
For a property to qualify for agricultural property relief, it must come within one of the limbs of IHTA 1984, s 115(2). Under limb 1, only agricultural land may qualify. Under limb 2, is added woodland and intensive rearing buildings which are 'occupied with' that land and 'used in connection with' the agricultural activities carried on upon it. Farmhouses, farm cottages and farm buildings may only come within limb 3 and must be both 'occupied with' the land and 'of a character appropriate to' it.
It has not been indicated what legal rights the company is to have over the (limb 1) land (clearly it is not to own it), but for it to carry on the statutory trade of farming it must 'occupy' it (TA 1988, s 832(1)).
More materially, only a 'farmer' (as construed in community law) may be the transferee of the entitlement to single farm payments. That entitlement could, therefore, (now) be transferred to the company, but it would almost certainly need to have 'occupation' of the land to qualify as a recipient.
In order to obtain 'occupation', the company will need to have the status of tenant, i.e. enter into a farm business tenancy with the landowner. And to avoid a substantial stamp duty land tax charge under FA 2003, s 53(1A), this would have to be at a full rent. As regards the (limb 1) land, provided that it has been in the same ownership for seven years (see IHTA 1984, s 117(b)), this would still result in 100% agricultural property relief (see IHTA 1984, s 116(2)(c)).
But the fact of severing the occupation (as opposed to ownership) of the farm from that of the farmhouse will create difficulties under limb 3, as interpreted in Rosser v CIR [2003] SSCD 311, even though it is likely that the house in question would, had nothing been done, have passed the 'character appropriate' test. The central problem under this decision is that, here, no farm land whatsoever is intended to be retained in the occupation (as opposed to ownership) of the resident of the farmhouse.
Furthermore, the new interpretation formulated by the Lands Tribunal recently in the second Antrobus case (Lloyds TSB Private Banking plc v Twiddy [2005] EWLands DET 47 2004), that only a farmhouse occupied by a working farmer qualifies for agricultural property relief, would be far from helpful to any claim. This would be the case even if the landowner were to be the managing director of the company unless the farmhouse were to be included in the tenancy (with its attendant income tax complications).
Even though the standard agricultural planning tie (on which the valuation issue before the Lands Tribunal hinged) would not have been breached by a reorganisation such as is postulated here, it is far from clear that the indications given in the decision, that former farmers' residences qualify under limb 3, can be justified by reference to the statutory wording.
Reply by N.K.:
Here we have the position where I assume it is the farmer who will control the farming company and continue to work on the land and live in the farmhouse. For inheritance tax, it is the purpose to which the property is put that controls its availability for agricultural property relief. The relevant sections are IHTA 1984, ss 116, 117 and 119. The relief given is dealt with in s 116, whilst s 117 covers ownership and occupation.
Ownership of the agricultural property for seven years enables a person to qualify for the relief (s 117(b)), with occupation reducing this period to two years (s 117(a)).
Looking at the suggested situation of the 'occupation by company', s 119(1) says: 'For the purposes of ss 117 and 118 above, occupation by a company which is controlled by the transferor shall be treated as occupation by the transferor.'
Regarding the single farm payment scheme (which relates to Scotland and is called 'single payment scheme' in England, Wales and Northern Ireland) and incorporation, under Finance Act 1993, s 86(2), (Single Payment Scheme) Order SI 2005 No 409, which came into force on 22 March 2005, this introduced — under TCGA 1992, s 155 — Class 7A, a new class of asset for rollover relief, 'Payment entitlements under the single payment scheme (that is, the scheme of income support for farmers in pursuance of Title III of Council Regulation (EC) No 1782/2003)'. The background to the status of single farm payment scheme is described in HMRC's Tax Bulletin Special Edition (June 2005), saying that the payment entitlement is tradeable.
Editorial note.
JdeS raises an interesting point regarding the possibility that the farmhouse would not be eligible for agricultural property relief on basic principles. N.K. refers to IHTA 1984, s 119, but this pointedly does not refer to s 115. The importance of the basic principles of 'occupied with' in s 115(1) was recently illustrated in Williams (personal representative of Williams dec'd) v HMRC (SpC 500) (see Taxation, 27 October 2005, page 88).
See also Adrian Baird's article 'Back to the plough' in this issue of Taxation.
