Inheritance Tax is something that can rarely be avoided. Every person has a threshold available, currently £325,000, below which Inheritance Tax is not payable.
On death of a spouse, assets will pass to the surviving husband or wife as an exempt transfer, therefore not incurring any inheritance tax liability. When the surviving spouse then dies, the threshold at which tax becomes liable takes into account both parties allowances, thus increasing the threshold to £650,000. The value of the estate above either threshold is liable for Inheritance tax at 40%.
It is common for farms and estates to be worth substantially over this threshold value and therefore there is the potential for very large tax bills on death. However, if you own a working farm, Agricultural Property Relief (APR) is available on the agricultural value of the asset.
To claim APR, you must have owned the property for 2 years prior to death, or if rented, 7 years prior to death. Briefly APR is available on the agricultural value of land along with ancillary farmhouses, cottages and buildings which are both character appropriate to the size of the holding and used for agricultural purposes. The relief is available on 100% of the agricultural value of the property, if it is owner occupied or rented on a Farm Business Tenancy. APR is only available on 50% of the agricultural value of the property, if it is rented on an Agricultural Holdings Act 1986 Tenancy.
Whether a farmhouse is character appropriate to its land, and therefore eligible for agriculture property relief for inheritance tax purposes, is not always as simple as it sounds.
A recent decision at the upper tribunal has confirmed previous thoughts that the whole farming business should be taken into account when deciding if a farmhouse should be eligible for APR, rather than just the ownership of the property in question.
In HMRC v Hanson 2013 the deceased was the life tenant of the farmhouse, which was owned by a trust, and the deceased’s son occupied the farmhouse. The farmhouse was the base for the farming operations over 215 acres, of which the deceased had an interest in only 61 acres.
HMRC argued that only the land in common ownership should be considered for testing the character appropriateness of the farmhouse, and both sides accepted that 61 acres was not a viable farming unit and the farmhouse would not be eligible for APR. However the deceased’s son argued that the test for character appropriateness should also be based on the land occupied by himself as this was the land farmed in association with the farmhouse that should be taken into account, and again both sides accepted that if this was the case, on 215 acres, the farmhouse would be eligible for APR. At the first tier tax tribunal the decision was in favour of the deceased’s son, in that all the land occupied alongside the farmhouse should be taken into account, not just the land in common ownership, therefore the decision was to allow APR on the farmhouse. HMRC challenged this decision at the upper tribunal, however the decision was upheld.
From this case future decisions on the character appropriateness of a farmhouse will take account of the land being occupied along with the farmhouse, not just on the land in common ownership with the farmhouse.
Therefore, in practical terms, if you own a farmhouse with say 10 acres, which is farmed alongside say 150 acres which is rented from a third party, then, provided they are occupied by the same person for the purposes of agriculture, the farmhouse should now be eligible for agricultural property relief.