Working farmhouses and agricultural property relief on death - May 2009

For many years farmers have felt safe in the knowledge that on death the farmhouse would be protected from Inheritance Tax thanks to Agricultural Property Relief (APR). In more recent years we have seen the government take steps to close tax avoidance schemes whereby so-called 'hobby' farmers have been taking advantage of this relief and investing their assets into agricultural land. The first point to remember is that APR is given on the agricultural value of the land only, which is likely to be less than the actual market value of the land. (Note, it is often possible to cover the difference by applying Business Property Relief but this is a separate issue).

For a farmhouse to qualify for agricultural relief it seems that it must now satisfy the following conditions.

The agricultural property must have been either:

  • occupied by the deceased for agricultural purposes throughout the two years ended with the date of transfer, OR
  • owned by the deceased throughout the 7 years before death and occupied by him or another for agricultural purposes throughout that period

AND

  • the farmhouse must be of a 'character appropriate' to the relevant farmland at the date of death (or gift if appropriate), AND
  • the farmhouse must be a property occupied by a full-time working farmer, AND
  • the farmhouse must be the dwelling from which the agricultural operations over land are conducted and managed

Each of these conditions raises further issues and every case is unique. However, it is clear now that it will not be nearly so easy to get APR as a hobby farmer but also many other genuine farmers will suffer under the new rules. For example, where a farmer retires and gives all or most of his land to his son or daughter, the farmhouse will usually cease to be eligible for relief.

It is important to consider the position of the farmhouse within your own farm and decide whether or not it meets all of the above conditions. With careful tax planning measures, problems with APR can be resolved, or at the very least minimised.

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