As we approach Spring, owners of grassland may be considering the grant of Grazing Licences and owners of agricultural land may be considering entering into Cropping Licences, whether for anaerobic digestion plant feedstock or otherwise.
Accordingly, now is a good time to review the key characteristics of a Licence and the potential effect they may have on the ability of a landowner’s estate to claim Agricultural Property Relief (APR) against an Inheritance Tax (IHT) liability on death.
Grazing Licences and Cropping Licences are short term agreements, usually granted for a period of less than 365 days with no right of renewal. The person receiving the benefit of the Licence is granted the right to undertake specific activities (typically, the taking of a crop of grass either mechanically or through the grazing of livestock or the growing of a specific crop). All other rights in the land (including hedge cutting, boundary maintenance and rights necessary to comply with the requirements of the Basic Payment Scheme or any Environmental Scheme affecting the land) are reserved to the landowner. This structure avoids creating a Tenancy. The actual exercise by a landowner of these reserved rights is key, both in terms of demonstrating the arrangement is, in fact, a Licence and, determining the availability of Inheritance Tax Relief.
These points were considered at the end of 2019 in the case of Charnley and Another v HMRC which focused on a Mr Gill who owned a small farm of about nine hectares in the north of England. Although Mr Gill’s farm was of a small size and all his land was subject to annual Grazing Licences the broad principles of the case are applicable to larger holdings.
The general position is that in the case of agricultural land APR can apply provided the tax payer can show either two years ownership and occupation (i.e. by an active farmer) or seven years ownership of let land (with the rate here being 100% relief where the land is let under a tenancy granted after 1 September 1995 and 50% relief where the land is let before 1 September 1995 and there is no right to vacant possession within 24 months).
When Mr Gill died, HMRC agreed to grant APR on the value of his farm land on the basis of seven years ownership. rather than on the basis of his actual occupation of the land for two years. However, HMRC did not believe that the farmhouse and outbuildings were occupied for the purposes of agriculture for the two years before Mr Gill's death because they found that in practice he had “rented out” his land. APR on these assets was therefore initially refused.
Mr Gill’s executors argued that he had in fact remained in active possession, control and occupation of the land as, under the Grazing Licences, he was responsible for maintaining hedges, fences, controlling weeds and other activities. These kinds of “reserved rights” are typical in a well drafted Licence agreement.
Importantly, evidence of these activities actually being carried out by the landowner was available through detailed records of Mr Gill’s work on the farm and evidence from the graziers in the form of witness statements. It was the evidence of farm diaries, photographs and the witness statements which gave the greatest weight to the Tribunal’s decision that Mr Gill had been in occupation of the land and to rule against HMRC. The content of the written Grazing Licence and the fact that Mr Gill received income under the Basic Payment Scheme was of less importance. The effect of the decision was to allow a claim for APR in respect of Mr Gill's house and agricultural buildings.
While the case of Charnley is only a First Tier Tribunal Decision, it does constitute a victory for a tax payer claiming APR on land which is subject to Grazing Licences, where active management of the land is undertaken by the landowner and recorded. However, it also provides an important reminder that landowners should not merely rely on the written terms of a Grazing or Cropping Licence but instead should actively follow their terms and exercise the reserved rights to demonstrate that is the case.