Your farmhouse and inheritance tax

In recent years, claims for Agricultural Property Relief (APR) on farmhouses have come under scrutiny by HMRC as house prices have risen, particularly in the South East, and country farmhouses have become more attractive for wealthy non-farmers and overseas investors.

When looking at APR, it is important to define ‘farmhouse’. Although there is no legislative definition, broadly speaking it is a dwelling for the farmer and a place where the farming operations are conducted.

But who is the farmer within this definition? When someone owns the farmhouse and surrounding agriculture land, and runs the farm on a daily basis, they are clearly the farmer. However, the answer is not always clear cut, especially in modern farming where land may be let on grazing licences, to contract farmers, be managed by agents, or form part of a partnership or shared farming agreement. In these instances, the APR position will be dependent upon how ‘hands-on’ the farmer is. It is advisable to hold meetings within the farmhouse itself and to make sure that the location is documented within the minutes. Records should be kept for a minimum of seven years in order that evidence about where the business operates from can be provided to HMRC.

Once it has been established that the dwelling is indeed a ‘farmhouse’, certain periods of ownership must be satisfied for it to qualify for APR. If the transferor is the farmer, and has owned and occupied the farmhouse for a two year period, then the occupation test is satisfied. If the transferor is not the farmer, the farmhouse must be owned for seven years and must be occupied by the farmer during this period.

HMRC will investigate two additional aspects to determine whether the farmhouse is of a ‘character appropriate’ to the agriculture land. Firstly, they will look at what agricultural land is taken into consideration. The agricultural land in question must be the dominant feature, meaning that there has to be a link between the land and the farmhouse, namely, common occupation between the two. Secondly, HMRC will consider whether the house is proportionate in size and nature to the requirements of the farming activities conducted on the agriculture land, taking into account the size, layout, content and style of the farmhouse when taken with the associated farmland and buildings. Other factors that will be considered are the value of the house in relation to the profitability of the land, and whether the house is dominant or ancillary to the land itself.

If the above criteria are satisfied, APR will be granted at 100%. However, it will only be given on the ‘agricultural value’ of the land, not the open market value. HMRC will take into consideration development or mineral value of the land, or whether the property might attract wealthy commuters. In such instances, the agriculture value is likely to be less than the open market value. From past experience, a benchmark used by HMRC seems to be a 30% reduction, meaning APR could be applied to 70% as this would represent the ‘agricultural value’ of the property.

For advice on how your farmhouse may be subject to inheritance tax, please contact Caroline for a free initial discussion.