Another Attack on Agricultural Relief on Farmhouses - December 2007

For a number of years now HMRC have been attacking the inheritance tax relief on farmhouses in a bid to prevent 'lifestyle farmers' from claiming relief in order to avoid paying tax on their deaths. The result of this is intended to restrict the relief to 'real' farmers. However, a new recent tax case has put these provisions in danger for all farmers.

The tax case in question concerned a claim for agricultural relief on a house which had for roughly 76 years been let out to a tenant who farmed the land and then in more recent years after the tenant left in 1984, the owners of the property entered into a contract farming arrangement for arable farming. A land agent was employed who was responsible for the management of the land, dealing with contractors (including invoicing them), the farming activities and so on. The only input by the taxpayer was a few meetings with the land agent each year either at the house or by phone.

Agricultural relief was denied on the house as it did not fulfil the definition of a farmhouse in law. These definitions include the following issues which were taken into account in this case:

  • A farmhouse was a dwelling for the farmer from which the farm was managed
  • The farmer of the land was the person who farmed it on a day to day basis rather than the person who was in overall control of the agricultural business conducted on the land
  • The status of the occupier of the premises was not the test but the proper criterion was the purpose of the occupation of the premises. However, if the premises were extravagantly large for the purpose for which they were used, or if they had been constructed upon some more elaborate and expensive scale, it might be that, notwithstanding the purpose of occupation, they should be treated as having been converted into something more grand, and
  • The decision as to whether a building was a farmhouse was a matter of fact to be decided on the circumstances of each case and was to 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 area of farm being farmed.

The last 2 tests are not new - these have been demonstrated over the last few years in various well known cases. However, the first two points of law do cast doubts on the availability of relief in a variety of situations and certainly not restricted to cases of this type.

For example, suppose Mr & Mrs Farmer have farmed the land from the farmhouse all their lives but at the ages of 65 they decide to retire and allow son to take over. Son lives in his own house, therefore Mr & Mrs Farmer's 'farmhouse' is no longer the dwelling from which the farm was managed and they are also not the persons who farm the land on a day-to-day basis. This is a common situation and under these new rules agricultural relief would be denied on the farmhouse. It is also not clear if farmers letting their land out on grazing licences will be caught within this new definition.

The case has gone to appeal so until the Appeal Courts hear the case we will not really know the extent to which these principles will be applied but it is certainly something to be aware of and consider in relation to your own farming enterprises.

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