INHERITANCE TAX - is your farmhouse at risk?

Over the past few years, HM Revenue & Customs (HMRC) have been closely scrutinising all claims for Agricultural Property Relief, and three landmark decisions in recent years have strengthened their position in such a way as to suggest that more and more applications will be challenged.

 

Much of HMRC’s attitude is thought to stem from the number of farms that have been sold off to wealthy city people to whom the idea of ploughing their money into property with a 100% exemption from Inheritance Tax is extremely attractive. Hence, the price attained for these farms is increasingly more than their inherent agricultural value.

 

The focus for HMRC is not on the farm in total, it is on the farmhouse and whether it is, in fact, the core of a working farm or whether it is just a large country house with land, purchased for lifestyle reasons and not in order that the new owners can generate a major part of their income from farming the land.

 

The first landmark case – Antrobus 1 – surrounded the question of whether or not a rundown but substantial house was, in fact, of a ‘character appropriate’ to its 120 acre holding. The initial euphoria by the owners, when the house was deemed to be ‘appropriate’ was quickly quashed when the case was referred to the Lands Tribunal for determination of the agricultural value as opposed to the open market value. Thus began Antrobus 2 – the second landmark case. The Lands Tribunal decided that the agricultural value was only 70% of the open market value of the property, and so 30% of the value was subject to Inheritance Tax. Victory for HMRC and another step along the path that has progressively alarmed many landowning families.

 

Another aspect of the new approach to Agricultural Property Relief came in the McKenna case last year (2006) where HMRC queried whether this property was actually a farm house because the owners did not farm the land – they were purely ‘lifestyle’ farmers and the farming was carried out by contractors who were in turn overseen by agents.

 

These new attitudes and rulings are all well and good in terms of preventing Inheritance Tax avoidance by land owners who cannot truly claim to be hands on farmers. However, it could well create many casualties, such as elderly farmers who have handed the responsibility over to contractors because of ill health or mental deterioration or farmers’ widows who are not qualified to carry on the farming operation and so employ contractors instead.

 

We are told that HMRC are not seeking to attack commercial farming operations, but if there is a question of a farmhouse being disproportionate in size and perhaps value to the land holding, it is important that the owners consider the options available to them.

 

There are a few basic questions to be asked in order to determine whether you feel your agricultural property may be subject to Inheritance Tax. These are:

 

Is the character of the house appropriate in the context of the size, content, and layout of the farm?

 

Is the size of the house proportionate to the farming activities associated with the land and its agricultural production?

 

Is there a ‘lifestyle’ value to the property over and above its agricultural value?

 

Can the owner demonstrate full day to day involvement in the management of the farming enterprise? (This is a particularly crucial one – especially for those who are involved in contract arrangements or farming partnerships.)

 

If you feel that there may be a risk of liability for Inheritance Tax, then changes to your Will may be recommended, and measures to mitigate liability or create funds to cover liability for Inheritance Tax should be put in place as quickly as possible.

 

For further information or for a free initial consultation on any of these issues please contact either Philip Bedford at our Taunton office on 01823 286274 philip.bedford@lentells.co.uk or Debbie Thatcher at our Chard office on 01460 64441 debbie.thatcher@lentells.co.uk  or Mike Grifiths at our Seaton office on 01297 20584 michael.griffiths@lentells.co.uk