A house? or a farmhouse?
The difference between a house and farmhouse is huge as far as tax is concerned. One comes with several tax advantages, the other does not. So what makes a house a 'farmhouse'?
The farmhouse is a fairly unique asset from a tax perspective. For most non-farming, non-business -owning people, one’s family home is their principal asset, often by a long way. For all that there are next to no tax reliefs in life or for a death estate for the family home; whilst the Residence Nil Rate Band (“RNRB”) is a welcome relief for a death estate for Inheritance tax (“IHT”) purposes, even that is far from as generous as it first appeared when it was introduced. There are no blanket IHT exemptions as they are for trading business assets, no income tax reliefs on day to day expenses, no mortgage interest relief (since the abolition of MIRAS in 2000) and no chance to claim back VAT on any bills or repairs. However, by calling a “house” a “farmhouse”, wonderful things start to happen as far as tax opportunities are concerned. The principal one is that for IHT, Agricultural Property Relief (“APR”). As far as IHT planning goes, more often than not, once an adviser is sure that their clients have secured 100% APR and/or Business Property Relief (“BPR”) then the job is largely complete. For farms, the Achilles heel in such planning is often the farmhouse and ensuring that APR applies to that as well as the land, for whilst it is undoubtedly a key asset for the farming trade, it is also a private residence; outside the NRB and RNRB, no such IHT relief would be available for such an asset outside a farming or business environment. Over the years I have braced myself for Treasury Budgets to amend or even deny APR to farmhouses altogether (same for tenanted land!), but fortunately it has been left untouched for some time. However, HMRC will often challenge a claim for APR on a farmhouse if they feel it is either not occupied as a farmhouse or, more likely, that it is not “character appropriate” as required in the legislation. What makes such challenge interesting is that there is no statutory definition of what “character appropriate” means; instead we have had to rely on largely on case law.
The first thing that needs to be established is that the farmhouse is being occupied by the same farmer who is also occupying the farmland. There must be a connection in occupation (not necessarily ownership per the case of Trustees of William Hanson Settlement v. HMRC  UKFTT 351) between the two. The farmhouse must be the base from which the farm is being run. In their guidance, HMRC have used various cases to add to that definition: “a farmhouse is the place from which the farming operations are conducted” (CIR v John M Whiteford and Son  TR 157); “it must be a dwelling for the farmer from which the farm is managed” (Rosser v IRC  WTLR 1057) and “a farmhouse is the chief dwelling-house attached to a farm, the house in which the farmer of the land lives” (Lloyds TSB Banking v Peter Twiddy DET/47/2004). This is rarely an issue with owner-occupied farms but when others are working the land as graziers or contractors then the owner must ensure that they remain in exclusive occupation rather than anyone else. Should the land become occupied such that the other person effectively holds exclusive possession – like an actual tenant – then the common-occupation connection with the farmhouse, and thus APR, is lost. As if this weren’t bad enough, whilst APR can be retained for any tenanted farmland for the agricultural value, BPR will be lost on any development value. The Northern Irish case of McCall v. HMRC  NICA 12 is an ideal example of what can happen when the grazier looks too much like a tenant. Whilst the APR was secure, the agricultural value of the land was only £165,000; the total value however was £5.8million and that additional value needed to be covered by BPR. But the Court held it was effectively being tenanted, therefore an investment asset so not qualifying for BPR. Losing the APR on the farmhouse would be a further blow upon a bruise.
Ensuring this does not occur is not only about ensuring those other parties on the land do not have exclusive occupation, but ensuring the paperwork is in place to prove it should HMRC query an APR/BPR claim. For example, a water-tight grazing agreement would not be automatically renewable, not last the full 365 days a year and ensure the landowner retains exclusive occupation; anything to the contrary coupled with evidence of the grazier undertaking the duties of a landowner could lead to HMRC concluding the grazier is actually a tenant. Grazing agreements are, almost by definition, usually very informal arrangements with no or little in the way of paperwork; even if there is there is no guarantee it is APR/BPR-proof. For wont of a nail vital reliefs could be lost and huge amounts of tax payable upon death when it is too late to do anything about it. The advice is to make sure the paperwork is both in place and takes into account the IHT reliefs, the need for exclusive occupation by the landowner and that the agreement is a mere licence rather than tenancy.
The next thing to remind ourselves with APR is that even if the house is occupied by the farmer who also farms the land, the relief only applies if the property is “character appropriate” i.e. that it is, by all appearance, a genuine farmhouse. The first Antrobus case (Lloyds TSB (PR of Antrobus Dec’d v. HIRC (2002) STC 468) and that of Higginson (Higginson’s Exec. v. IRC  STC 483) laid down some of the principles needed to be examined to ascertain whether a farmhouse is indeed a farmhouse; or merely a house with some land:
- Is the farmhouse appropriate and proportionate to the farming business in terms of size, content and layout?
- Does the farmland predominate?
- Would a reasonably-educated rural layman regard this as a farmhouse, or merely a house with land
- History of the house – how long has it been associated with agricultural production?
- The ‘elephant test’ as to whether it is a farmhouse – difficult to describe but you know one when you see one!
Thereafter comes the question of how much relief is available. If the property is deemed to be in excess of one which is “character appropriate” to a farmhouse then that excess value will not be covered. Every case will be different and there is no hard and fast rule as to whether a farmhouse would be character appropriate and if so how much value could be called agricultural. The Valuation Office would look at all factors in the round and decide whether it is a farmhouse, and if so, to what extent. The second Antrobus case (in the Lands Tribunal (ibid DET/47/2004)) held that the grade 2 listed Tudor house in question was a farmhouse to the extent of 70% of its value, thus leaving the remaining 30% chargeable to IHT. Hopefully a normal, stereotypical farmhouse will have nothing but agricultural value and thus attract APR on 100% of its value. Professional support from a friendly and experienced chartered surveyor will be vital to gauge the agricultural and total values of a property as well as the character appropriate criterion to make (and support if necessary) an APR claim.
Large Grade 2 listed mansions are almost bound to have some value above and beyond that required on a farm, but that doesn’t necessarily prevent them from being farmhouses in the first place if they are genuinely used as farmhouses and are deemed of appropriate character to some extent. Even if only 70% of the property is deemed to be of agricultural value, that is more than other private residences are afforded.
Care must therefore be taken to ensure not only is the farmhouse used as a farmhouse, but that the occupant of said house is also farming the land. Any grazing, contractor or share farming agreements must ensure the house’s occupier is also in exclusive occupation of the land and anyone else is merely there on licence, agreement or as agent. On the face of it, APR is an easy and valuable relief to obtain, which private houses could never hope to obtain outside the RNRB. This makes it all the worse to stomach if the relief is lost for wont of a nail… or a well-drafting grazing agreement.
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