We have all heard the stories of HM Revenue & Customs checking local obituaries to see if a deceased individual was described as a “farmer” or a “retired farmer” when making a decision on the availability of Agricultural Property Relief (“APR”) on a farmhouse.
It seems to be the case, anecdotally at least, that HMRC’s focus is shifting towards the question of whether the deceased was an “active farmer” rather than the question of “character appropriateness”. Of course, claims for APR on a farmhouse should consider the associated land and the question of whether it
is commensurate with the character of the property. However where this test is not cut and dried, in the question of their liability to Inheritance Tax, it may come down to the detail of the farmer’s activity.
Broadly speaking, 100% APR is available on death where agricultural property has been owned and occupied by the deceased for agricultural purposes for a two year period prior to death. If agricultural property is let for the purposes of agriculture, it must have been owned by the deceased for seven years prior to death. The farmhouse must be character appropriate to the holding of which it forms part and be occupied, together with the land, for the purposes of agriculture to qualify for APR. Problems arise when the farmer’s activities reduce with age and the day to day farming activities are contracted out.
Advisors and taxpayers have been able to take some comfort from the case of Golding (2011) where a farmer (in his 80s when he died) had farmed a 16 acre smallholding in Staffordshire for more than 65 years.
At the date of his death he lived in the three bedroom farmhouse which was in a very poor state of repair. Initially he had farmed the land intensively but in later years, he cut back his farming activities so that most of his produce was for his own consumption and he only made a very small profit. HMRC argued that the farmhouse was not “character appropriate” on the grounds that the farm was not financially viable, therefore the question of “active farmer” was a part of their challenge.
The First-Tier Tax Tribunal (“FTTT”) did not agree with HMRC and instead said that it is necessary to take account of a number of different factors when deciding whether the farmhouse is of a character appropriate rather than just focusing on the profitability of the farm. The FTTT concluded that, taking account of Mr Golding’s age, the fact that he did not do much active farming any more was not relevant. It was sufficient that Mr Golding tended chickens and sold eggs at the farm gate, had been an active farmer in younger years and maintained farming accounts throughout the period of occupation.
The Golding case provides some reassurance that in old age it is not unreasonable for a farmer’s activity to decrease and that this should not preclude a claim to APR where they remain involved in the agricultural activity on the land and in occupation of a character appropriate farmhouse. However taxpayers and advisors should not become complacent and the specific facts of each individual case should be interrogated to ensure that they would stand up to scrutiny from HMRC.
Take the example of a recent situation where an unsuccessful claim for APR was made by the executors of an estate. A brief summary of the facts are set out below:
- The deceased occupied a farmhouse of modest size and value;
- The deceased owned around fifty acres of agricultural land subject to a mixture of formal and informal grazing/mowing licences;
- The deceased’s activities on the land were detailed as:
- Day to day inspections of livestock;
- Single Farm Payment claimed from the Rural Payments Agency as an active farmer since 2008;
- Maintaining permanent pasture including harrowing, topping, fencing, boundary repairs and drainage work.
HMRC accepted without challenge that the land qualified for APR as it had been owned by the deceased for more than seven years prior to his death and it was occupied for the purposes of agriculture. However they denied a claim for APR on the farmhouse and the reasons for this included:
- The executors could not produce any evidence of the deceased’s involvement e.g. minutes of meetings as the deceased had kept only informal (and minimal) records;
- The deceased did not have any farming accounts;
- The executors could not provide bank statements as evidence of payments associated with farming activities as the deceased kept his money ‘under the mattress’;
- The District Valuer attended the property and as part of his valuation exercise he spoke with the deceased’s neighbours who confirmed that they let the land from the deceased and rarely saw him;
- There were no stock licences or stock movement reports;
- The deceased did not own a tractor or other machinery suitable to carry out the farming activities;
- The deceased’s occupation had been described as “retired farmer” in correspondence with the Department of Work and Pensions.
HMRC argued that the activity which the deceased had carried out on the land was not sufficient for the purposes of APR and instead it was simply the work of a landlord keeping his land in good repair.
When it comes to considering a claim for APR, on a farmhouse in particular, the evidence of agricultural activity and agricultural occupation is key. Careful record-keeping by the taxpayer and his professional advisors, photographs and minutes of meetings and any other evidence to demonstrate agricultural use can all assist and should not be underestimated.
One of key factors is whether the occupant of the house has a significant role in the management of agricultural operations on the land. HMRC have acknowledged that as farmers grow older and their work rate drops, reduced business turnover and profitability do not of themselves mean that a farmhouse will cease to qualify for APR. However taxpayers and their executors should be aware of the potential pitfalls when it comes to the detail of each individual case.