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June 6, 2013

Agricultural Property Relief - Hanson Case Update re Farmhouses

Overview of Agricultural Property Relief

Agricultural Property Relief (APR) is a very important inheritance tax relief.

Where necessary conditions are met, relief is given in a similar manner to Business Property Relief (BPR) by reducing the value of the property being transferred for tax purposes potentially to nil.  The relief is available in respect of inheritance tax arising in respect of lifetime gifts, on death and periodic/exit charges of a trust.

What is Agricultural Property

The term agricultural property refers to land in the UK, Isle of Man, Channel Islands or EEA that is used for the purposes of agriculture and includes:

  • farmhouses, cottage and buildings that are appropriate to the property,
  • woodlands/buildings used for the intensive rearing of livestock,
  • growing crops, when transferred with the land
  • stud farms engaged in the breeding/rearing of horses and land used for grazing associated with those activities,
  • land and buildings used in the cultivation of short rotation coppice,
  • land within a habitat scheme

Hanson Case - Upper Tier Tribunal Rules in Taxpayers Favour re Farmhouse

A frequent bone of contention between taxpayers and HMRC is the availability of agricultural property relief on farmhouses.

In order for APR to be available the farmhouse must be of a character appropriate to the farm.

Over time the courts have set out a number of factors that should be considered in applying the character appropriate test.  For example the farmhouse should be appropriate by reference to its size, layout content and the particular area being farmed.

In determining whether the farmhouse is appropriate by reference to its size, HMRC's view is that there should be a connection or nexus between the farmhouse and the land occupied with it and that this nexus should derive from the farmhouse and land being in common ownership.  Support for this view was found in the case of Rosser v IR Commrs 2003.

Thus, according to HMRC the farmhouse and the land used for agricultural purposes should be owned in the same name.  This interpretation has given rise to issues regarding the availability of APR where assets have been transferred between different family members.

However, in the recent case of Hanson v HMRC the upper tier tribunal upheld the earlier decision of the first tier tribunal, that the nexus between the farmhouse and the land may be common occupation rather than common ownership.

The facts of the case were that  Mr Hanson (through a trust) owned the farmhouse together with approximately 25 acres of land.  Mr Hanson's son occupied the farmhouse and other farming land of approximately 215 acres which was farmed.  If HMRC's view had been accepted the character appropriate test would have been looked at in reference to the 25 acre holding rather than the 215 acre holding.  However, the upper tier tribunal held that the legislation does not require common ownership.

This is good news for those holding agricultural assets and could expand the potential inheritance tax planning that may be undertaken without restricting the availability of APR.

That said, it is important to note that the upper tier tribunal did state that there could be circumstances where the correct nexus would be ownership and not occupation.

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