Farmhouse Tax and Agricultural Property Relief

Farmhouse Tax

Following on from farmland and its ever increasing value, commonly the second most valuable asset in a farmer’s estate is the farmhouse.  It is all too often assumed that the farmhouse will be Inheritance Tax (“IHT”) free on the death of the farmer; this can be a surprising and costly mistake for the executors and family.

There are generally two types of farmer, the first covering a range of “professional” farmers from tenant farmers working very hard to make a profit and pay the rent, to the larger farmers who do fairly well with the need for good income tax planning advice to keep their tax bills down.

The second type are the “lifestyle” farmers, often wealthy businessmen or “professionals” such as surgeons or barristers, in it for the nice big old farmhouse and the country views and not too bothered how much profit they make. They will usually employ a farm manager to run the farming business or work in partnership with the neighbouring farmer in exchange for a share of the profits.

What has become increasingly common over the last ten years is that these lifestyle farmers are not only looking for a nice house with views and land but also have an eye on the tax benefits of owning a farm, in particular the inheritance tax breaks they hope to gain when they die and pass on their estate to the next generation.

Inheritance Tax and Agricultural Property
When you die, inheritance tax is charged on your estate at 0% on the first £325,000, and at 40% on the rest, but there are certain reliefs that reduce this charge, including Agricultural Property Relief (“APR”).

APR reduces the value of agricultural property charged to inheritance tax by 100% in the case of a farm that you “occupy for the purposes of agriculture” yourself. If the executors of a lifestyle farmer can convince HMRC that they “occupied” the farm “for the purposes of agriculture”, then there may be no IHT to pay on the value of the land and the farmhouse.

Farmhouse?
As a general proposition, the question of whether farm land is “occupied for the purposes of agriculture” presents fewer difficulties than the same question applied to the farmhouse.

HMRC have been getting increasingly strict as regards to the eligibility of the farmhouse for APR, and they have won several tax cases in the last few years, denying APR to what is often a very valuable asset.

A prominent case (the McKenna case) went before the Special Commissioners and they denied APR on the McKenna farmhouse and in doing so gave a useful summary of how the law currently stands on this issue.

These are the principles (and pitfalls) that the lifestyle farmer needs to consider:

A farmhouse is the building where the farmer lives and from which the farm is managed – so, if the farm is actually run by another farmer from the next village, no relief will be due.

A farmer is the person who is actually active in running the farm on a day-to-day basis and is not necessarily the owner of the farm and the farmhouse.

What Sort of Farmhouse is it?
The law says the farmhouse must be “of a character appropriate” to the land being farmed, so a grand manor house on 12 acres of arable land is not going to work. The question of how “appropriate” the farmhouse is should be decided by considering:

The relationship between its size and value to the size, value, and profitability of the land being farmed;
The layout of the house – a small games room and a large farm office would be a good idea;
The nature and location of farm buildings – if the majority of the buildings are used as stables (not farming) and any machinery is kept in your neighbours barns, it would count against you;

Would an “educated rural layman” look at it and say “that’s a farmhouse”, or would he say “what a magnificent country mansion” – this is known in the trade as “the elephant test” (you know one when you see one).

“Agricultural Value”
Even if you get over all the above hurdles, you may still not get full relief for the value of the farmhouse because APR only applies to the “agricultural value” of the property. Some farmhouses have a “tie”, meaning they can only be occupied by someone who makes their living from farming, and this helps to reduce the value somewhat. APR is only due on that reduced value, so if there is no “tie” on the farmhouse the difference between the “tied” value and the normal open market value does not qualify for APR. The difference depends on the particular case (any “hope value” for future planning permission?) but the general rule seems to be that the agricultural value is only about two – thirds of the open market value.

Workers Hands?
In summary, a simple test for the lifestyle farmer is to look at your hands at the end of the day, if they are smooth with no dirt around the nails, you may have an IHT problem. Even if you do get your hands dirty, if as you scrub them clean, you can see out to where a new development is being built just next to your land, you still may find that not all the value of the farmhouse will be free of inheritance tax!

If you would like to discuss in more detail anything raised in this article, or would like to have a chat about your own personal circumstances, please contact Neil Roberts on 01777 707373 or email neil.roberts@wrightvigar.co.uk  – we would be delighted to hear from you.