|Agricultural property relief|
|Agricultural property relief is an attractive concept. It means owners of agricultural land can qualify for 100% relief from IHT. But, while the concept sounds attractive, it is a complicated tax.|
There are three qualifications that have to be met to gain agricultural property relief. First, the land has to meet the IHT definition of “agricultural property”. Second, the property has to be occupied for agricultural purposes.
Third, the land must be owned for at least two years if the owner farms the land. If the land is let by the owner to someone else who farms it, then it has to be owned by the owner for seven years and throughout that period occupied for agricultural purposes.
To qualify for 100% relief, the owner has to have the immediate right to vacant possession of the property, the right to obtain it within 12 or 24 months or if the property is let on a tenancy beginning on or after 15 September 1995.
While these are the main qualifications, there are complications within each of them. Care needs to be taken because HMRC is looking more closely at claims for agricultural property relief.
This was reflected in the landmark case known as Antrobus. This involved about 120 acres of land with an impressive, if ramshackle, manor house. The old lady who farmed the land had lived there all her life and farmed almost until her death. This was an unusual set of circumstances as, for example, sheep were living in the chapel.
HMRC, however, challenged the claim that the house qualified for agricultural property relief on the grounds that it was not a farmhouse “of a character appropriate” to the agricultural land.
The Special Commissioners found in her favour, which meant the farmhouse and land qualified for relief. This was followed, however, two years later by a decision of the Lands Tribunal. It said first that the value of the farmhouse for the purposes of the relief should be significantly less than the open market value as a residential property because it had to be assumed to have an “agricultural tie”.
It then went on to attempt to cast doubt on whether a farmhouse could qualify for relief where the occupier was not primarily engaged in farming as his or her main livelihood.
This may be seen as an attempt by HMRC to curb people from cities, who buy so-called “lifestyle farms” of a few hundred acres or less with a farmhouse, from qualifying for agricultural property relief. It is clear a “farmhouse” cannot be a grand mansion with a small plot of land. There are also signs that HMRC is looking to attack cases where there is not a full-time farmer residing at the farmhouse and a contractor is employed to do the farming on their behalf.
But there is no requirement in the IHT legislation for the owner to be a full-time farmer to qualify for the relief. The legislation says the land has to be used for agricultural purposes and the farmhouse has to be of a character appropriate to the farmland. It does not mention the need for the owner to be a full-time farmer residing in the farmhouse.
One important issue now is where a farm is transferred to a trust. Under the new tax regime for trusts, land that qualifies for agricultural property relief will be exempt from this tax if held for at least two years before the transfer.
The difficulty may be in knowing in advance whether land, and particularly the house, will qualify for relief. One option suggested is to transfer an undivided share in the property worth just above the nil rate band of £285,000. HMRC will not provide a view on whether agricultural land qualifies until there is an event that triggers a potential liability to tax, such as death or a chargeable lifetime transfer.
By transferring land into a trust, however, an IHT return has to be made and HMRC will take a view on whether there is a tax liability. If a farm is worth £3 million then, leaving aside the question of discount for undivided shares, 10 percent (£300,000) could be transferred into a trust. If that does qualify then the other 90 percent can be transferred into a trust.
Where farm land is already in trust, you need to consider whether the land qualifies for relief or will be subject to a tax charge of up to 6 percent every 10 years. It may be worth allowing a 10-year charge to arise to test the relief.