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 case^d 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 IRC^e 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 IRC^f 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