The Office of Tax Simplification (‘OTS’ established on 20 July 2010 to advise the Chancellor on delivering a simpler tax system) has on its “to do list” a review of Agricultural Property Relief (‘APR’). With this in mind and the prospect that “simplification” might not be to the advantage of parties relying on APR under the current regime, perhaps now is a good time for farming folk to sow their seeds for succession planning.
Uniquely, in farming (unlike even other owner-managed businesses) both the land and the buildings are the source of the business profits, while at the same time they may also be the home of the farmer and his family. In many cases the land and buildings will have been in the family for generations. The tax system (as it stands) admits succession by the next generation by offering relief from inheritance tax in the form of APR on the agricultural value of the land and buildings. Typically this will include the farmhouse and in some circumstances the value of any other dwellings occupied by family members who are employed in agricultural. Private Client lawyers and Tax Practitioners increasing need to turn to APR to try to protect large agricultural values from inheritance tax (‘IHT’).
In contrast with Business Property Relief, where “mere assets” are excluded from consideration, APR is principally assessed on the value of “mere assets” in particular categories as follows:-
- Agricultural land or pasture;
- Woodland occupied with agricultural land or pasture; where occupation is ancillary,
- Buildings used for intensive stock or fish rearing; where occupied with agricultural land or pasture and occupation is ancillary.
- Some Farm cottages or buildings and their land; of a character appropriate to farm buildings and their land of a character appropriate,
- Some farmhouses and their land of a character appropriate, stud farms or land in habitat schemes; and
- a “look through” provision to the assets of farming companies.
With the exception of a heritage house open to the public there is virtually no other form of residence that can escape a charge to IHT making it very popular for taxpayers to claim that their residence should be treated as a farmhouse. In some of the instances outlined above, however, APR will only be attracted where the occupation of the land or buildings is ancillary to a farming purpose. Activities which are not farming include;
- the letting of cottages,
- the letting of farm buildings;
- equine activities other than the breeding of horses;
- market gardening and growing Christmas trees and commercial woodland (where that is the main activity undertaken);
It should also be borne in mind that letting the land associated with a farmhouse on a Farm Business Tenancy (‘FBT’) will be fatal for any claim for APR as the occupant of the house is no longer the occupier of the land. Issues can also arise where the land is no longer occupied “for the purposes of agriculture”.
Under s.117 of the Inheritance Tax Act 1998 (‘IHTA’) the conditions for APR have to be satisfied continuously for either a two year period (farming by the farmer) or a seven year period (land continuously owned by the farmer but let throughout the previous 7 years and occupied for the purposes of agriculture) prior to the relevant date which is either to be the date of death or a gift. If the conditions are not satisfied in that period then relief will be wholly denied, there are no provisions for apportionment. The danger is that although nothing in the legislation as such requires a farming operation to be profitable (which is just as well in the present economic climate) difficulties do arise for a farmer who may at points during those time periods have relied as a sole source of income on an entitlement to Single Farm Payment. There are particular difficulties where, in reliance on that scheme, the farmer has sold all farm machinery and other equipment. In such a situation farm buildings may have become redundant and as a result they will lose APR being no longer “occupied” for the purposes of agriculture.
Illness or disability also present particular dangers. Where the occupant of the farmhouse has to be taken into hospital care; APR will be denied if the property is let to help fund care costs. Relief on the other hand should be guaranteed if the absence is for less than two years, the house is kept ready for the expected return of the occupant, and the house continues to function as a farmhouse. HMRC continue to argue that no relief will be due if there is no “realistic” prospect of a return. In case where there has been an inability to farm through illness for the two years prior to the assessment date, APR has been denied.
Diversification might seem to be the solution to economic difficulties for many farmers, but there are pitfalls that will lead to the loss of APR. Such pitfalls include permitting the grazing of pasture predominantly by recreational horses, which does not qualify as an agricultural occupation. Allowing buildings to be used for housing recreational horses will debar relief in the same way as the pasture. As referred to above, separating the ownership of buildings from the ownership of land that historically the buildings have been occupied with will lead to loss of relief. Buildings that are not used for any purposes are therefore not occupied for the purposes of agriculture as required by Section 117, such as old barns, watermills, granaries, dairy buildings and any buildings that have no other recognisable use. All these will all lose APR.
The only obvious solution for the farmer if APR is not to be lost is to find a new agricultural use. However Business Property Relief (‘BPR’) and prenuptial agreements may offer slightly less obvious alternative solutions.
In that context it is worth remembering that APR only applies to the agricultural value of agricultural property. Section 115(3) of the ITA (1984) states in relation to agricultural value that “the agricultural property should be taken to be the value which would be the value of the property if the property was subject to a perpetual covenant prohibiting its use otherwise than as agricultural property”. This is likely to be lower than its open market value, except where that presumption is borne out in an Agricultural Tie condition in the planning permission for more recent farmhouse development.
The value in excess of agricultural worth may qualify for BPR. Therefore it ought to be considered that every claim for APR should have a supporting claim of BPR to prevent a tax on areas of mixed estate that do not qualify for APR. Should APR disappear or be simplified this protection should be considered in advance of any change as a result of the review by the Office of Tax Simplification. Careful and considered estate planning should be at the forefront of every farmer’s mind.