Farmhouses and Inheritance Tax (IHT)

02 March 2006

Agricultural Property Relief (APR) is generally available on a transfer of property by lifetime gift or on death where two conditions are met. If it is available, then IHT either is charged on only half the agricultural value of the property or it is not charged at all.

Generally, 50% relief is available where the property is let on a (pre-1995) Agricultural Holdings Act tenancy; 100% relief is available on property held and occupied freehold or let on a Farm Business Tenancy. There are exceptions but these will not be considered here.

The two conditions referred to in the first paragraph above are: -

(a) The property must be “agricultural” in nature; and

(b) it must have been occupied “for the purpose of agriculture” for 2 years (owner/occupier) or 7 years (let).

So far as farmhouses are concerned, for the first condition (agricultural nature) to apply, the house must be held with farmland and be “appropriate” for the farm concerned. If the basic qualification is met then it is only the "agricultural" element of the full value that attracts relief. The “agricultural value” of a farmhouse ordinarily worth £700,000 may be, say, £500,000. If 50% APR was available, tax (at 40%) would be payable on 50% of that £500,000 and tax (at 40%) would be payable on the unrelieved balance of £200,000.

Total tax : 40% x 50% x £500,000 = £100,000

40% x £200,000 = £ 80,000

£180,000

For the second condition (occupied for the purpose of agriculture) to apply, the definition of “agriculture” is relevant and changing. It is not, however, particularly relevant for the purpose of the warning contained in the following paragraphs.

The most recent relevant case (commonly called Antrobus No. 2) makes a further major attack on APR for farmhouses. In this case, the basic definition of “farmhouse” was looked at by the Lands Tribunal. The Tribunal there considered the nature of the occupation of the farmhouse in the context of the first condition (agricultural nature). Had it looked at the point in relation to the second condition (occupied for the purpose of agriculture), it might not have produced such a draconian apparent result.

In Antrobus No. 2, the Tribunal effectively said that for APR purposes “a farmhouse is the chief dwelling house attached to a farm, the house in which the farmer of the land lives”. It went on to suggest that only the house of the person who has the day-to-day management of the farm can qualify as a farmhouse for APR purposes. He is the one who is most closely involved with farming the land making his principal living from it. This in turn suggests that the person who is in overall control or who is the owner of the agricultural business may not occupy a “farmhouse” at all. His house will then attract no APR even if it satisfies other normal conditions.

Recent cases do not produce a clear statement of law. They centre (for our purposes) on the fact that the “farmhouse” has to be occupied by the “farmer” who appears to have to be the hands-on manager (rather than the overall owner/controller of the business). Two main groups are now at risk from the uncertainty thus created. They are: -

(a) Older farmers who have handed over management to the next generation while remaining in the main house on the estate; and

(b) “lifestyle” farmers who have bought a farm with house and who get a third party to do the actual farming.

There does not seem to be an obvious “way out” of the problem unless (for group (a)) an exchange of houses within a farming family is practicable.

Antrobus No 2 is a Lands Tribunal decision. It is capable of being clarified or overturned on appeal (none known to be planned) or by another case going to the higher courts. It leaves – for many who have given their lives to the family estate – an unsettling concern for the future.

For more information please contact Christopher Wacher, Partner & Head of Commercial.
 

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