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First tier tribunal decision: HMRC’s approach to APR on farmhouse is wrong

01 May 2012

In a recent case, the first Tier Tribunal has found against HMRC’s approach in determining whether a farmhouse qualifies for agricultural property relief from inheritance tax. In the past, HMRC have argued that the farmhouse and the land to which it is of a “character appropriate” must be in the same ownership. In the case of Hanson v HMRC [2012] UKFTT95 (TC), the First Tier Tribunal upheld that the house and the land must be in the same occupation but need not be in the same ownership.

The facts:

Mr Hanson died on the 9 December 2002.  The house in question was 11 The Green, Great Haywood, Milton Keynes.  The house was held under a life interest trust for Mr Hanson with remainder on trust for the first of his sons to survive him and attain the age of 21. His son Joseph Nicolas Hanson (Nick) was the son who satisfied the condition. On 17 February 2006, Nick became the sole trustee.

On father’s death, APR was claimed on the house on the basis it was the farmhouse within section 115 of the Inheritance Tax Act 1984.  The house was a detached residence with a Grade II listing.

The deceased and his wife Daphne moved into the property following their marriage in 1947.  When the deceased’s father had died in 1960 APR was successfully claimed on the house.

From 1947 to 1978 the deceased and his wife lived in the house.  They moved into another property and Nick and his family moved in and lived there rent-free.

When the deceased’s father was alive the farm consisted of some 800 acres.  When he died, the deceased and his brother farmed in partnership and the deceased’s two sons joined in in 1986.

In time, Nick and his wife separated and a few years later the deceased and his brother partitioned the farm.  The deceased owned some land in his own name and some still joint with his brother.  In total, the deceased owned and part owned 280 acres which was used for mixed farming.  The deceased farmed this land with his two sons until their partnership was subsequently dissolved and 100 acres was sold.

Nick took 120 acres of land and continued to live in the house.  He ran the farming operations from the house and in total he farmed the 120 acres plus 25 acres that was part owned by the deceased and another 42 acres.  He rented a further 20 acres and this continued up to the date of his father’s death.

Following the death, the house was put up for sale.  The value agreed for inheritance tax purposes was £450,000.  Nick had carried out a lot of work on the property which he estimated to cost in the region of £175,000.

At the date of death, the deceased owned a third of 5 acres which was occupied by Nick, one sixth of 20 acres which was occupied by Nick and one half of 36 acres which was occupied by his nephew.

The Tribunal had to consider two issues:

  1. Whether Nick had acquired an equitable interest in the house and as such this would reduce the value or eliminate the value to be included in the deceased’s estate; and
  2. Whether the house was a farmhouse within section 115 (2) of the Inheritance Tax Act 1984.

Did Nick have an equitable interest in the house?

The Tribunal’s decision providing whether or not Nick had an equitable interest in the property is worth reading.  In summary, they decided that Nick did not have an equitable interest in the property as for such an equitable interest to arise there must be common intention by both the legal owner and the claimant that the claimant should have a beneficial interest in the land.  In the Tribunal’s opinion there was no evidence of common intention in this case.  In the Tribunal’s opinion, all the evidence pointed the other way.  The Inland Revenue Account stated that the deceased had a right to benefit from the house and that Nick occupied it under a licence and did not pay rent.  This was inconsistent with him having any beneficial interest in it.  Further, his mother had given evidence that he could have been asked to move out of the house at any time.  There was also a “gentleman’s agreement” with the deceased that if Nick died before his father the house would go to Nick’s brother which was entirely inconsistent with him having an equitable interest.

 

Was the house agricultural property?

Turning to the question of whether or not the house was agricultural property within the meaning of section 115 of the Inheritance Tax Act the Tribunal’s decision summarises the relevant legislation as follows:

“In outline  ……..  IHT is charged on the death of a person on the value of the property to which he was beneficially entitled or in which he had an interest in possession immediately before his death.  However, where such a property included “agricultural” as defined, then a reduction of the “appropriate percentage” is applied to the agricultural value of such “agricultural property”.  It is a condition for such a reduction that the “agricultural property” must have been occupied for the purposes of agriculture – either by the deceased throughout the period of 2 years ending with his death, or by the deceased or another person throughout the period of 7 years ending with the deceased’s death”.

To obtain the relief the claimant must show not only that the property is agricultural property but also that it had been occupied for the purposes of agriculture throughout the relevant period ending with the death of the deceased.

HMRC’s view:

In this case, all parties agreed that this house was a Farmhouse but HMRC denied the claim for relief on the basis that there was insufficient agricultural land in both common ownership and common occupation with the farmhouse for it to pass the character appropriate test.  Before the hearing, HMRC conceded that if all the land in common occupation with the farmhouse (regardless of his ownership) could be taken into account for the purpose of the character appropriate test, then the farmhouse would satisfy the requirements of section 115 (2) of the Inheritance Tax Act 1984.  Mr Hanson’s family had conceded that there was insufficient land in both common occupation and common ownership for the farmhouse to pass the character appropriate test but that the nature of the nexus required between a farmhouse and the agricultural land or pasture is only occupation and not ownership.

The First Tier Tribunal disagreed

The First Tier Tribunal allowed the appeal on the basis that the farmhouse needed to be in the same occupation as the property to which it was of a character appropriate but need not be in the same ownership.

The only reported case to deal with this matter at length in the past had been the Rosser case.  In Rosser,Peter Twiddy had argued that the nexus must be derived from common ownership and not occupation.  The Tribunal did not agree and in their opinion the meaning of the words in the definition of section 115 (2) IHTA is that cottages, farm buildings and farm houses must be of a character appropriate to agricultural land or pasture in the same occupation but it is not required that they should be in the same ownership as the agricultural land or pasture.

This literal construction of the agricultural property relief definition of “agricultural property” is significant.  It can apply to a range of situations in which the ownership of the farmhouse is separate from the ownership of the land farmed with it.  Consider, for example, where the farmer has moved out of the farmhouse and given away much of the land to which it is of a character appropriate but retains ownership of the house.

HMRC stressed the importance of this issue in its submissions to the Tribunal and it is very likely that HMRC will appeal.  The cases of Starke and Rosser do not provide authority for HMRC’s view that the character appropriate test requires both occupation and ownership and from the Hanson case it now appears that common ownership is not required but merely common occupation.

For further information, please contact Alison Hall on 019 1 232 8345 or email alison.hall@hay-kilner.co.uk