• news-banner

    Expert Insights

Inheritance and the Farmhouse

One consequence for farmers and landowners of the pandemic-induced rise in rural house prices over the past few years is an increased exposure to inheritance tax on the value of their home (absent any reliefs). The residence nil rate band (RNRB) was introduced in 2017 to enable married couples leaving their home to their children to pass down a total of £1m free of inheritance tax; however, as the RNRB is subject to tapering for estates in excess of £2m (and tapered to zero for estates worth more than £2.7m), the RNRB is becoming increasingly irrelevant to larger landowners and farmers. Obtaining Agricultural Property Relief (APR) on the farmhouse presents a valuable alternative opportunity to shield the agricultural* value of the farmhouse from inheritance tax, although there are various hoops to jump through to make a successful claim.

For a ‘farmhouse’ to qualify for APR, it must:

  1. be considered to be a farmhouse;
  2. have been occupied for the purposes of agriculture for the requisite period (two or seven years depending on ownership / occupation combination); and
  3. be of a character appropriate to the agricultural land. 

The third of these criteria in particular has been the subject of much litigation so we have a body of case law to guide our analysis of this test.

What constitutes a farmhouse?

There is no definition of a farmhouse in the legislation; however, case law has established that “a farmhouse is the place from which the farming operations are conducted”a; or “a dwelling for the farmer from which the farm is managed”.b

This necessarily poses the question of who is the farmer. A house occupied with a farm is not a farmhouse simply because the person living there is in overall control of the agricultural business conducted on the land.c  The farmer is someone who farms the land on a day-to-day basis – the more ‘hands on’ the ‘farmer’ is, the higher the chance that a property constitutes a farmhouse. For example, if the agricultural land is subject to grazing licences where the licensor has few duties under the licence, it may be difficult to argue that he is a ‘farmer’ in this scenario. Similarly under contract farming arrangements, if the contract farmer is left to make all the decisions, it is unlikely the property would be accepted as a farmhouse. This risk also applies where a farm manager or agent is employed.

Occupation for purposes of agriculture

To qualify for APR, the farmhouse must have been either:

  • owned and occupied by the transferor (or a company controlled by him) for the purposes of agriculture throughout the two years preceding the transfer; or
  • owned by the transferor (or a company controlled by him) throughout the seven years immediately preceding the transfer and occupied by him/the company or another for the purposes of agriculture throughout that period.

Satisfying the “character appropriate” test

The factors to determine whether the farmhouse is of a character appropriate, set out in HMRC’s manual, are as follows:

  • Is the farmhouse appropriate by reference to its size, layout and content with the farm buildings and the particular area of farmland being farmed?
     
    In the Antrobus I cased Cookhill Priory (an original Tudor building with Georgian and twentieth century additions, set, together with a range of farm and agricultural buildings, in about 126 acres of agricultural land or pasture), was considered to pass the character appropriate test for a farmhouse. Much of this decision seemed to turn on the hands-on nature of Miss Antrobus as a farmer – and that she seemed to treat Cookhill Priory as an extension of the farm buildings in that it was itself often invaded by farm animals! It was also persuasive that farm buildings had been built close to the Priory and in its line of view.

    HMRC are likely to consider the proximity of the property to the farm buildings and generally how it is situated in relation to the agricultural land.

  • Is the farmhouse proportionate in size and nature to the requirements of the agricultural activities conducted on the agricultural land?

    This test overlaps with the one above and the same factors are likely to be taken into consideration.

  • Within the agricultural land does the land predominate so that the farmhouse is ancillary to the land?

    In Higginson’s Executors v IRCe a house called Ballyward Lodge, set in an estate in Northern Ireland of 134 acres (of which 63 acres was agricultural land but the House was set in 3 acres of formal gardens, with 68 acres of woodland and wetland surrounding a lake), was not held to be agricultural property.

    The capital values of the agricultural land versus the property as well as the extent of garden in relation to the property would be relevant here.

  • Would a reasonable and informed person regard the property simply as a house with land or as a farmhouse?

    In the case of Dixon v IRCf the house in question was a cottage with orchard and garden amounting to 0.6 acres. Although some fruit had been grown in the orchard and hens kept in the garden, it was held that the cottage was not of a character appropriate to agricultural land or pasture; instead the orchard and garden were of a character appropriate to a rural residential property.

  • Applying the “elephant test”, would you recognise this as a farmhouse if you saw it?

    In the aforementioned case of Dixon v IRC, Special Commissioner Dr Nuala Brice explained that although you may not be able to describe a farmhouse which satisfies the character test, you would know one when you saw it. HMRC recognises that this test involves some subjectivity but recommends it as a means of ruling out extreme cases.

    One would not expect properties of significant size and value that do not look like your quintessential farmhouse to fare well on this test.

  • How long have the farmhouse and agricultural property been associated and is there a history of agricultural production? The matter has to be decided on the facts that existed as at the date of death or transfer but evidence of the farmhouse having previously been occupied with a larger area of land may be relevant evidence.

    This test was also set out in the case of Dixon v IRC above.

    Providing evidence of an historic agricultural connection of the property - or of a property that previously existed on that site would be valuable here.

  • Considering the relationship between the value of the house and the profitability of the land, would the house attract demand from a commercial farmer who has to earn a living from the land, or is its value significantly out of proportion to the profitability of the land?

    The annual income generated by the farming business versus the annual expenditure required on the property are likely to be in point, although note that a loss-making enterprise is not on its own considered to be a determinative factor.

  • Considering all other relevant factors, including whether any land is let out and on what terms, is the scale of the agricultural operations in context?

    All of the above factors are to be considered in the round and then a balanced view taken.

While establishing the first two criteria should be relatively straight-forward in most cases, a body of evidence is likely to be required by HMRC to address the various factors in relation to the character-appropriate condition. We would encourage farmers and landowners to take advice as to the potential availability of APR in relation to their home, to enable them to take a view of the inheritance tax exposure, and if necessary, put in place alternative inheritance tax planning (such as life cover).

*It should be noted that APR only applies to shield the agricultural value of property from inheritance tax and that the agricultural value of a property does not equate to its open market value. As set out in legislation and confirmed in the case of Antrobus II (Lloyds TSB Banking v IRC [2005] WTLR 1535), agricultural value is “the value which would be the value of the property if the property were subject to a perpetual covenant prohibiting its use otherwise than as agricultural property”. In Antrobus II the discount applied to the open market value was 30%, which serves as a useful guide.


aCIR v John M Whiteford and Son [1962] TR 157

bRosser v IRC [2003] WTLR 1057

cArnander and others v HMRC [2006] UKSPC 565

dLloyds TSB (personal representative of Antrobus) v IRC [2002] STC (SCD) 468

e[2002] STC (SCD) 483

f[2002] STC (SCD) 53

Our thinking

  • Women in Leadership: Planning for the future

    Sarah Wigington

    Events

  • Computer says No - my prediction of UK border chaos on Wednesday 1 January 2025

    Paul McCarthy

    Quick Reads

  • Providing pro bono support on social housing issues

    Susan Field

    Insights

  • Charles Russell Speechlys Partner Promotions 2024

    Bart Peerless

    News

  • Has a new route to recovery opened up for victims of banking payment frauds?

    Katie Bewick

    Insights

  • Charles Russell Speechlys boosts its Real Estate offering with the arrival of Kim Lalli and Rafe Courage

    Kim Lalli

    News

  • Cosmopolitan quotes Sarah Jane Boon on how to deal with break-up admin

    Sarah Jane Boon

    In the Press

  • Property Patter: Building and Fire Safety Miniseries - part 1

    Michael O'Connor

    Podcasts

  • Sex discrimination at work

    Michael Powner

    Insights

  • Daniel Sullivan writes for Law360 on hundreds of 'rogue filings' being lodged via Companies House and advice for affected banks

    Daniel Sullivan

    In the Press

  • The Financial Times, The Guardian and City AM quote Sophie Dworetzsky and Dominic Lawrance on Labour’s proposed tax crackdown on non-doms

    Sophie Dworetzsky

    In the Press

  • The Lawyer covers the launch of our new Advanced Client Solutions team

    Joe Cohen

    In the Press

  • Charles Russell Speechlys expands innovation offering with creation of new Advanced Client Solutions team

    Joe Cohen

    News

  • Why Switzerland is poised to become a prime jurisdiction for families to establish their private trust companies

    Dharshi Wijetunga

    Insights

  • The Evening Standard quotes Kelvin Tanner on Skilled Worker Visa increases

    Kelvin Tanner

    In the Press

  • Property Patter: Net Zero Building Standard

    David Savage

    Podcasts

  • Charles Russell Speechlys advises Countryside Partnerships on its joint venture with Abri to develop 1,500 homes in West Sussex

    Sarah Wigington

    News

  • London’s Knowledge Clusters: From Emerging to Maturing – Start Ups on the Global Stage?

    Lynsey Inglis

    Quick Reads

  • Charles Russell Speechlys continues to bolster Banking & Finance practice with the recruitment of Philip Withey

    Philip Withey

    News

  • Charles Russell Speechlys boosts international private wealth offering with the arrival of Amira Shaker-Bortman

    Amira Shaker-Bortman

    News

  • Combatting lookalikes in the light of Thatchers v Aldi

    Mary Bagnall

    Insights

  • Mark Howard writes for the Evening Standard on the blocked Telegraph takeover, the NSI Act and the Enterprise Act 2002

    Mark Howard

    In the Press

  • Britain's most successful female Olympian has retired at 31, but how does the Family Court treat (early) retirement?

    Matt Foster

    Quick Reads

  • Fashion and the Green Claims Code brought into focus by open letter from the CMA.

    Ilona Bateson

    Quick Reads

  • How the abolition of Multiple Dwellings Relief affects Build to Rent

    William Marriott

    Quick Reads

  • Will new powers at Companies House stop or slow down fraudsters?

    Peter Carlyon

    Quick Reads

  • Charles Russell Speechlys hosts international arbitration event in Dubai

    Peter Smith

    Quick Reads

  • It’s not just a High Court decision, it’s a successful M&S High Court Decision

    Sophie Willis

    Quick Reads

  • 'Saltburn': How the Catton family could have protected the Saltburn estate and could Oliver's inheritance still be contested? (Part 2)

    Grace O'Leary

    Quick Reads

  • 'Saltburn': How the Catton family could have protected the Saltburn estate and could Oliver's inheritance still be contested? (Part 1)

    Grace O'Leary

    Quick Reads

  • The ongoing fight against fakes

    Charlotte Duly

    Quick Reads

  • Beware of not obtaining a court order when settling your finances

    Julia Mauricio

    Quick Reads

  • Planning essentials case update: when can an enforcement notice against an unlawful use also require the removal of related structures?

    Sadie Pitman

    Quick Reads

  • Vulnerable elders : a harrowing story and the lessons which need to be learnt

    Sarah Wray

    Quick Reads

  • Digital Markets, Competition and Consumers Bill: Will new consumer protection rules restrict access to Gift Aid?

    Verity Heath

    Quick Reads

  • Home buyers and sellers hit by cyber-attack

    William Marriott

    Quick Reads

  • International Relocation: The Parent Trap 25 years on ...

    Joshua Green

    Quick Reads

  • Autumn Statement provides little comfort for farmers and landowners

    Hannah Connors

    Quick Reads

  • Top Tips to Building your Brand - Women in Chancery

    Katelyn Silver

    Quick Reads

  • What next for residential property? Autumn Statement Update

    William Marriott

    Quick Reads

Back to top