Mr Osborne’s budget in the summer of 2015 implemented a staged increase in the Inheritance Tax (IHT) threshold from £325,000 to £500,000 between 2017 and 2021 via the ‘family home allowance’. This can then be doubled for married couples and civil partners. This is all very well, but what about additional agricultural assets on and above this threshold? Many will be aware of the reliefs that are available for agricultural property.
The two primary reliefs to consider are Agricultural Property Relief (APR) and Business Property Relief (BPR). First one must look at APR, which is available at 100% on the agricultural elements of a property. The initial consideration is whether the farm is owned and farmed in hand, or let to an agricultural tenant. Where it is owned and farmed in hand, for APR to be available it must have been owned for at least two years prior to the death of the owner. Where the land is let to an agricultural tenant however the ownership period before APR becomes available is seven years.
Of course to qualify for APR the land must be used for agricultural purposes. Woodland not occupied or ‘used as part of the farm’ with agricultural land is ineligible, as are pony paddocks used recreationally and farms not occupied for agricultural purposes. It is also important to consider the extent of the buildings on the holding and whether these, by their size, dominate the land, rather than being ancillary to it. Where buildings dominate and are not considered ancillary to the land, they may not be eligible for APR. One vital point that has been the subject of several cases over the years is whether a farmhouse is ‘character appropriate’ to the holding. The overarching cases on character appropriateness are those of Antrobus No.1 & No.2 in 2002 and 2005.
The first Antrobus case hinged on the tests developed in previous cases for the ‘character appropriateness’ of a farmhouse to be a farmhouse on the holding in question. From this case it was clarified that there are five tests to consider when making this assessment, the outcomes of which will be vital in determining whether the farmhouse should benefit from APR:
o Is the house appropriate by reference to its size, content and layout, with the farm buildings and the particular area of farmland being farmed?
o Is the house proportionate in size and nature to the requirements of the farming activities?
o Does the house look like a farmhouse (the elephant test)?
o Would the educated rural layman regard the property as a house with land or a farm?
o How long has the house been associated with the agricultural property and the history of agricultural production?
APR is only available on the ‘agricultural value’ of the property, as defined by the Inheritance Tax Act 1984. Antrobus No. 2 considered the practicalities of establishing the ‘agricultural value’, as defined by the Act, as the value of the property if it were subject to a perpetual covenant prohibiting its use other than as agricultural property. The outcome suggested that although each case should turn on the evidence in point, it can be argued that the ‘agricultural value’ of a farmhouse may be up to 67% of its market value.
It is also important to consider agricultural property in further detail when considering Potentially Exempt Transfers (PET), where a gift of property results in relief from IHT where the benefactor lives for seven years after the gift. When looking at agricultural property in this context, one needs to take care if gifting a farm to two or more individuals in order to benefit from this relief, particularly if this results in one of the elements (particularly the farmhouse) being split off with only a small amount of agricultural land. Where a farmhouse and land are gifted as a PET, but where the PET fails and death occurs before the seven years have expired, there are provisions to clawback the IHT relief pro-rata. It is not often mentioned however that when this occurs with agricultural property, it is at the date of death the situation is again assessed for APR, not the date it was gifted. Also the status at this time will be viewed from the heir’s perspective. Thus where a farmhouse has been gifted to one heir and the land to another (or one of the heir’s sells off the land), and the PET subsequently fails, APR may no longer be available on the house as it is now separate from the land, unless of course the heir is farming in their own right.
Once the elements of the property eligible for APR have been considered one must look at the elements of the farming business that are not considered ‘agricultural’ for APR, but nonetheless are business assets which may be eligible for BPR. BPR is available at 100% for interests in a business, such as partnership shares or buildings owned and used by the business. Assets used in the business, but which are owned outside it, only attract relief at 50%. It should also be noted that BPR is not available on all investment property and this creates a particularly grey area when assessing commercially let buildings that were previously agricultural. The test to be applied is the ‘wholly or mainly’ test – where investment activities amount to more than 50% of the business’ activity, BPR may not be available. This test is complex and particular difficulty can be found when applying it to farms with significant letting interests (both commercial and residential). Care should therefore be taken and a plan formulated to ensure that land, letting and residential elements operate in unison to produce the most tax efficient outcome. Early advice from your accountant and land agent can make life for the next generation a lot easier.
