Farming families should be planning for the future if they want to take advantage of the inheritance tax relief that can be claimed for agricultural property, following two new rulings.
Under the inheritance tax rules, business property and agricultural property are not taxed. In the case of agricultural property, the relief is available for agricultural land and also buildings such as a cottage or farmhouse, if they are appropriate to the agricultural land.
Given that the rate of IHT is 40% and the value of even a modest farm bungalow may well be £200,000 or more, the relief is highly prized and disagreements often arise with HM Revenue and Customs (HMRC) as to whether a house or cottage qualifies.
Two recent cases illustrate just some of the areas being targeted by HMRC that farmers and smallholders need to be aware of.
In the first of these, it was good news for the family of a smallholder who had struggled to make ends meet. Mr Golding had farmed a smallholding in Surrey for decades but as time went by and he grew elderly, his farming activities gradually reduced until they consisted of selling eggs at his gate, producing an income of about £1000 per year. HMRC agreed that this constituted farming, but they denied agricultural relief for the value of Mr Golding’s house on the grounds that it was not of a character appropriate to the agricultural property. They relied on a 2006 case in which it was held that the farming must be reasonably profitable and that there must not be a wide discrepancy between the value of the farmhouse and the income or return from the agricultural land.
But in the case of Mr Golding, the First Tier Tribunal rejected HMRC’s argument, saying that lack of profit did not necessarily mean that the farmhouse was inappropriate. Instead, they said the question was whether Mr Golding had been farming, not whether he had been farming profitably. So, in this case, the family won, and inheritance tax was not due on Mr Golding’s house.
But in the case of Atkinson v HMRC, the family lost out, because the elderly head of the farm had moved out of his house into a nursing home as his health failed. None of the family had moved in to provide a continuing agricultural link, and the Tribunal ruled that the farming connection for the property had been lost.
The ruling was made despite Mr Atkinson remaining a member of the family farming partnership and taking part in discussions about the business. His bungalow remained furnished and his belongings were kept there. When he died the executors claimed agricultural relief for the value of the bungalow and the First Tier Tribunal agreed with them. However HMRC appealed to the Upper Tier tribunal and won. The tribunal held that there had to be a sufficient connection between the occupation of the bungalow and the agricultural activities being carried out on the agricultural land.
Alison Hall, Partner at Hay & Kilner Solicitors commented: “Inheritance tax issues too often are forgotten about until death and this gives rise to special difficulties for farmers, especially smallholders. As they grow older their farming activities may lessen and their income may decline as well. As health deteriorates it may be necessary to move to a residential home and, if occupation of the farmhouse or bungalow ceases, so does agricultural relief.
“At least the Golding case shows that lack of profitability does not mean that agricultural relief will be denied, but it is important to remember that Mr Golding carried on farming as best he could; a lack of profitability that is due to retirement will undermine a claim.”
She added: “The Atkinson case shows that if a farmhouse owner cannot continue to occupy a property, then steps should be taken to ensure that someone else engaged in farming the land moves into the house, for example a farming family member.”