Some farmers seeking to claim Inheritance Tax relief on their working farmhouses should find it easier following a recent court decision in their favour.
HMRC lost a long-running court case where it sought to charge inheritance tax on farmhouses where the farmland and farmhouse are not in common ownership.
The Upper Tax Tribunal delivered its long-awaited decision on 21 May deciding that agricultural property relief (APR) from inheritance tax on farmhouses is allowable where the farmhouse and farmland is not in common ownership but is in common occupation.
HM Revenue & Customs had claimed that Agricultural Property Relief (APR) only applied to farmhouses where the farmland was in the same ownership – effectively depriving tenant farmers and many family businesses from Inheritance Tax relief. However, both the First Tier Tribunal, and now the Upper Tribunal, have found in the taxpayer’s favour.
“When assessing if a farmhouse should qualify for APR, both tribunals found that the land which is farmed with the house must be in the same occupation, but not necessarily the same ownership as the house,” says Andrew Vickery, director at accountant Old Mill.
“This is contrary to HMRC’s existing guidance, and will be welcome news to many farmers.”
Affected parties include tenant farmers who have bought a plot of land and built a farmhouse adjoining the main tenanted land. “The judgement will be equally important for families who have given farmland to the younger generation, but where the older generation continue to own and occupy the principle farmhouse,” says Mr Vickery.
However, while the case represents an important win for genuine working farmers, great care still needs to be taken when considering whether APR will apply to general farming assets. “APR only covers the agricultural value of property and not necessarily its full market value - and the house must still be of a character appropriate to the size of the holding.”
Where land has development opportunity, it could add significantly to its value on death, even if it’s only ever been used for agricultural purposes, he adds. “Say the agricultural value of the land was £7,000/acre but the market value was £30,000/acre - even with APR there would be a shortfall of relief of £23,000/acre. That could add significantly to the Inheritance Tax liability.”
Those lucky enough to have assets with development potential should look carefully at how the ownership of those assets is structured, warns Mr Vickery. “It is possible to obtain relief on the full market value, but some restructuring in the business may be required. With land and development values seeming to rise year on year, and with HMRC’s increasing need to increase their tax take, careful planning is needed to ensure the continuation of many family businesses.”
Thames Valley and South Coast accountants James Cowper says this is an important decision in favour of the tax-payer and will be an enormous relief for farming families up and down the country.
Stephen Barratt, a director in James Cowper’s Rural and Bloodstock team said: “The main conditions for APR are that it must be a farmhouse occupied for agricultural purposes and be of character appropriate to the property. In determining character it is necessary to ascertain what property is to be taken into account.
“This is where difficulties arise. In many farming families, ownership and occupation of the farmland and farmhouse are inconsistent, with assets spread across different family members and generations. As a result, when assessing what IHT is due on a specific individual’s estate, matters can become complicated.”
The facts of this case are that whilst Mr Hanson owned the farmhouse for IHT purposes, it was his son who was living in the property and farming the 215 acres of land. Of the 215 acres, 128 were owned by the son with just 25 acres owned directly by the deceased, with the remainder either rented or owned by other parties.
Stephen adds: “In this case, HMRC accepted that the farmhouse was occupied for agricultural purposes, but did not accept that it was of a character appropriate to the amount of land owned by the deceased and farmed by his son as IHT is charged solely on the deceased's estate.
“The Upper Tier Tribunal, rightly, said that HMRC must take into account the entire area farmed by the son and that ‘common occupation’ applied.
“This is a welcome decision that will provide comfort for farming families, and enable APR claims where ownership is fragmented. It might also offer opportunities for owners of farmhouses to structure their affairs in a more tax-efficient manner.”
