UK inheritance tax is charged at 40 percent on the estate of a deceased person, and at 20 percent on certain lifetime transfers, when the total value of transfers exceeds the nil rate band of £325,000. Inheritance tax only applies to lifetime gifts if the donor dies within seven years after making the gift. Although most assets are subject to inheritance tax, there are important reliefs for business property and agricultural property.
Agricultural property relief applies to transfers of agricultural land, and the buildings such as cottages, farm buildings and a farmhouse occupied with the land provided that their character is appropriate to the property. Also included in the relief are woodlands and buildings used for the intensive rearing of livestock or fish, if their occupation is “ancillary” to the occupation of the agricultural land.
The definition of agriculture for the purpose of the relief includes the cultivation of short rotation coppice, a term used to describe the planting of certain types of tree at high density for harvesting at intervals of less than ten years. Agricultural property relief can also be obtained on land put aside for wildlife habitats under certain UK government habitat schemes.
The relief is given at 100 percent of the agricultural value of the land where the transferor of the land had the right to obtain vacant possession at a time immediately before the land was transferred, or had the right to obtain vacant possession within twelve months of that date. HM Revenue and Customs (HMRC) allow this period to be extended by concession to twenty-four months. The relief is also allowed by concession if the land is valued at a similar amount to the vacant possession value.
If the agricultural property is let property and the tenancy was granted on or after 1 September 1995, the 100 percent relief is given. Agricultural property relief is also available at 100 percent where a transferor has been beneficially entitled to the interest in the property since before 10 March 1981, subject to certain conditions.
For other transfers of agricultural property, if the above conditions are not fulfilled the rate of agricultural relief is 50 percent. The 100 percent or 50 percent deduction is applied to the “agricultural value” of the property, as if it were subject to a covenant prohibiting other uses.
Qualifying for agricultural property relief
In order to qualify for agricultural property relief, the person transferring the property must have occupied it for agricultural purposes for two years up to the date it is transferred, or if it has replaced other agricultural property the original property and the replacement property must have been occupied for two out of the five years immediately preceding the transfer.
Alternatively, the land must have been owned by the person transferring it in the seven years up to the date of the transfer and occupied for agricultural purposes by the transferor or another person throughout that period. Where the property has replaced other property owned by the transferor, then this condition will be fulfilled it the original property and the replacement property were occupied by the transferor or another person for seven out of the ten years up to the date of the transfer.
Practical issues in qualifying for relief
A number of legal cases have involved the question of precisely what is agricultural property for the purpose of the relief, and whether the buildings sold with that property are of a character appropriate to the property. Clearly, the law wants to distinguish between the sale of agricultural land with a farmhouse, and the sale of a normal residence that is surrounded by land which might have some agricultural features, but is not actually agricultural property as defined by the law. Various types of lifestyle farmer have blurred the boundary between a residential property and a farmhouse.
Some taxpayers may have an interest in claiming that their house is actually a farm for the purpose of obtaining agricultural property relief, by using a large garden for some purposes that resemble agricultural use. Others however may be lifestyle farmers who are engaging in some genuine agricultural activity.
Another source of disputes has been the situation where the land is undoubtedly used for agricultural purposes but the house has some value over and above its use as a farmhouse. In such cases the courts have considered that the agricultural value of the house is much less than its actual market value and have therefore only allowed agricultural property relief only on the deemed agricultural value.
In their inheritance tax manual, HMRC set out some criteria for identifying if the character of the farmhouse is suited to the agricultural property. These include the history of the property and of the agricultural activity; appropriateness of the farmhouse to the agricultural activities carried on; and whether the land is extensive as compared to the house, so the farmhouse can be considered “ancillary” to the agricultural land. Also taken into consideration is whether a reasonable and informed person would consider this to be a farm or just a normal house with surrounding land. They also apply the “elephant test” and consider if the house would be recognised as a farmhouse by someone who looks at it.
The agricultural property relief is a very valuable relief from inheritance tax in the UK. However the law was drafted at a time when the distinction between agricultural activities and other activities was much clearer than it is now. As a result, some lifestyle farmers may have difficulty in convincing HMRC that their property qualifies for agricultural property relief. The inheritance tax law may need some revision to bring it in line with modern life and farming practices.
HM Revenue and Customs www.hmrc.gov.uk
“Antrobus II: valuing a farmhouse” by Roger Jones in Tax Adviser, June 2006
“Taxwise II 2009/10” by R. Bennyworth, S. Jones and M. Waterworth, Lexis Nexis 2009