APR & Farmhouses – The Saga Continues
This article refreshes the main conditions for Inheritance Tax (IHT) Agricultural Property Relief (APR) and comments upon a recent case ahead of the appealMost publicly reported disputes between taxpayer and H M Revenue and Customs (HMRC) have been lost by the taxpayer. A case reported in early 2012 (Hanson (as trustee of the William Hanson 1957 Settlement) v HMRC ) has, however, gone some way to redressing the balance, though HMRC have appealed the decision (scheduled to be heard in 2013). This article refreshes the main conditions for Inheritance Tax (IHT) Agricultural Property Relief (APR) and comments upon the case ahead of the appeal.
What are the main conditions for APR?
The main conditions for APR on a farmhouse are that the house must be
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- a farmhouse occupied for agricultural purposes; and
- of a character appropriate to the qualifying agricultural property.
In order to satisfy the first test, the person occupying the house must be the ‘farmer, ie they must be involved in the farming operations, at least in terms of decision-making. In many cases this will be self-evident but for some elderly farmers satisfying this condition can be a challenge as greater responsibility for running the farming business is taken on by other family members, agents or contract farmers.
In determining whether or not the second condition is met, it is necessary to ascertain what ‘property’ is to be taken into account.
On the face of it and in terms of the physical area farmed, this might seem straightforward but in many farming situations, ownership and occupation of property, and ownership of the business is inconsistent, with assets often being spread between different family members and generations.
What property is taken into account and why is this case important?
In a previous case, it was decided that the potential necessary connecting factors between farmhouse and land were
- common ownership of the farmhouse and land and
- common occupation
Whilst the courts have not clearly enunciated this, HMRC have taken the view that both the farmhouse and the property must be in both common ownership and common occupation.
This view was tested before the First Tier Tax Tribunal in the recent case of Hanson.
When Mr Hanson, the owner of the house for IHT purposes, died it was his son who was living in the farmhouse. His son had in fact been living there, and farming from there for many years. The deceased had an ownership interest in a relatively small area of land farmed by his son.
It was accepted by both sides that the house was a farmhouse, and occupied for agricultural purposes, so the point at issue was whether or not it was of the necessary “character appropriate”, ie whether the farmhouse needed to be of a character appropriate to the land owned and farmed by the deceased, or the land farmed by his son.
HMRC put forward its case that only the farmland owned by the deceased can be taken into account for the character appropriate test because the IHT is charged solely on his assets. If this view was correct the area of land owned by the deceased would have been insufficient.
The Tribunal, however looked at the legislation differently, and concluded that the character appropriate test should take account of the area that his son farmed from the farmhouse, rather than be limited to that owned by the deceased. In doing so, it took the view that the test is better applied to the total area of land in common occupation with the farmhouse.
If this decision stands, it is good news for the farming community because it could provide comfort on the IHT status of the farmhouse and might open the way to tax planning opportunities.
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