.png)
.png)
We act for a beef farmer who runs a suckler herd and also rears sheep on land of approximately 120 acres. This is not a profitable business and he is considering renting out most of his land for silage and potato growing to other farmers, except for approximately 12 acres that he will use to run a small suckler operation. He will also try to contract out his own labour.
Naturally, we wish to preserve the inheritance tax relief on the farmhouse, which is a listed building, and believe that the change of operations may affect this.
Readers’ comments would be helpful as would any ideas to solve this problem.
Query 17,48 – Beefy.
Reply from Penelope Lang, Smith & Williamson
There are two main conditions for a house to be treated as a farmhouse for agricultural property relief (APR); the house must be of a character appropriate to the farm and must be occupied for the purposes of agriculture.
For the house to be of a character appropriate it must be proportionate in its size and nature to the buildings and land being farmed. It must also be proportionate in relation to the farming activities being carried out.
HMRC do look at the history of the house and the farm, so there are issues where part of the holding has been sold or otherwise ceased to be occupied over the years.
Assuming the house is of a character appropriate for a 120-acre farm, then one must consider whether the house is also appropriate for a 12-acre holding.
HMRC are likely to argue that the primary purpose of the house has become a dwelling for the landowner rather than a farmhouse (see Dixon v CIR [2002] SSCD 53 and Korner v CIR (1969) 45 TC 287). If he lets the land, someone else will be occupying the majority of the holding.
If, instead of letting the land, he enters into a contract farming arrangement or some other joint venture where he bears his share of the risk from the operation, he will be continuing to occupy the land for the purposes of agriculture and the relief on the house might be preserved.Even so, the preservation of the relief will need considerable effort on the farmer’s part.
Recent cases, Rosser v CIR [2003] SSCD 311, Lloyds Private Banking plc v Twiddy [2006] 1 EGLR (Antrobus 2) and Arnander and Others (executors of McKenna deceased) v HMRC [2006] SSCD 800, all point to the importance of the farmhouse being the place from where operations are run.
It is not sufficient for the occupier of the house to be a lifestyle farmer in overall control. Although farming need not be his main occupation he must take a very hands-on role in managing the entire farm.
The house must be the dwelling from where the farm is operated; i.e. where all farm meetings are carried out, where all farming decisions are made, where the seeds and fertilisers are ordered, where the books for the business are kept. There must be regular meetings with the contractor and clear evidence that the occupier of the house is in fact occupying the house for the purposes of agriculture.
If he contracts out his own labour, his income will be contracting income and not income from farming. Direct contracting for third parties will not assist him in his argument that he is occupying his house for the purposes of agriculture. He should look to occupy any land he is working.
Finally, IHTA 1984, s 117 states that the land must be owned and occupied for the two years prior to the chargeable event, so the farmer must keep farming to make sure the house is occupied for the purposes of agriculture until his death!
Reply from Tower
It will be tricky to solve this one. We might ask firstly whether the property does in fact qualify for agricultural property relief anyway, because there is a ‘character appropriate’ test for the relief.120 acres is not all that large and so the house had better not be too grand, given the size of the farm concerned.
Business property relief is rarely available on the farm house because the property normally falls within the exclusion for ‘excepted assets’ being an asset not used wholly or mainly for the purposes of the business concerned. This will not always be the case, but generally it has to be accepted that the property is mainly used as a private residence.
Once the farmland is let out to neighbouring farmers, the property will indeed cease to qualify for agricultural property relief on the basis of the decision in Arnander, Lloyd & Villiers (McKenna’s Executors) v HMRC [2006] SSCD 800 (Sp C 565) in that it will no longer be ‘the main dwelling from which the agricultural operations over the land are conducted and managed’.
What can be done about this? The answer may be very little. The simple fact is that if the house ceases to qualify as a farmhouse, it will cease to qualify for relief and unless the farming operations continue to be conducted by the client, whether as sole trader or in partnership with the third parties who will be using the land, there can be no hope of continuing relief.
Equally, transferring the property into a family trust will not be an answer, even if the initial transfer is below the nil-rate band because of the availability of relief at the time of transfer.
The continuing occupation of the farmhouse will be a reservation of benefit in the trust and unless that reservation of benefit ceases more than seven years before the death of the client, the property will form part of his estate on death.
Even if it is thought that reservation of benefit can be avoided by some means, pre-owned assets tax will rear its ugly head. Both issues could be dealt with by the payment of rent, but who wants to rent their own home from their trustees?
In short, it may have to be accepted that agricultural property relief will be lost and some alternative estate planning for the client will need to be considered.
There are still arrangements available to deal with inheritance tax on the main residence although the demise of the erstwhile double trust scheme leaves one rather reticent to continue planning arrangements in this area.
As an alternative, one can live in hope that the £1 million nil-rate band will eventually be introduced on a change of government.
