Is it possible to get Agricultural Relief on a Farmhouse?

When a farmer dies, it is possible to claim agricultural relief (AR) for inheritance tax (IHT) purposes against the value of the farmhouse.  However, there are various conditions that will need to be satisfied for the claim to be successful and to ensure the property is character appropriate.

HMRC are likely to scrutinise any claim for AR on a farmhouse to ensure the AR claim is relevant to the particular property and that the claim only relates to the agricultural value of the farmhouse and not its market value.  Given property prices, HMRC regularly challenge claims for AR.

What is a farmhouse?

There is no legal definition of what a farmhouse is.  Therefore, each claim has to be looked at on its facts.  Generally, the farmhouse should be the property in which the farmer lives and the centre from which the farm is managed.

Who is the farmer?

As the farmhouse needs to be occupied by the farmer, who is the farmer?  The farmer needs to be the person who lives in the farmhouse to farm the land associated with it.  Therefore, the farmer who farms in-hand the land surrounding the farmhouse is likely to qualify.

The position becomes less clear in relation to land owned by the farmer living in the farmhouse but who lets land to others to allow them to farm his land.  This will need to be looked at in detail.  The extent to which land is let, how long the land has been let, what the land is being used for and the terms on which the land is let is all relevant and will have an impact on whether a successful claim for AR on the farmhouse can be made.

Therefore, where a farmer leases all his land to someone else to farm, the farmer in unlikely to have a successful claim for AR on the farmhouse, although the land being farmed by someone else may still qualify for relief.

What if the farmer is in partnership?

Provided the farmhouse is still the centre of farming operations and is occupied by one of the partners and the partnership owns and farms the agricultural land then relief is likely to be available on the farmhouse.

Is AR available straight away?

If there is a farmhouse which would qualify for relief, as it passes the other tests, it would need to have been owned and occupied by the farmer (who is himself farming the land) for two years before AR is available.  If, the owner of the farmhouse is not the person doing the farming, so someone else is in occupation of the land, then the property would need to be owned for seven years, if relief is available.

What does character appropriate mean?

It means looking at the house together with other farm buildings and the land to ensure that the agricultural land is the dominant feature and the house is occupied with the land.

When considering the house, there will be various factors to consider such as the size of the property, the layout and style.  What is appropriate will also vary from area to area depending on the housing stock in that locality and other farmhouses.  As an example, a manor house which has a couple of acres of land associated with it is unlikely to be considered character appropriate.

The character appropriate test is commonly called the “elephant test” in that you would recognise a farmhouse if you saw one.

What can I do to maximise relief?

It is important to be involved in the farming practice as much as possible.  It is also necessary to demonstrate that the house is occupied with the land.  Therefore, preparing for questions which may arise from HMRC is helpful.  This can include, for example, keeping minutes of meetings held at the farmhouse, storing the farm accounts at the house, making sure all farm correspondence and invoices are addressed to the farmhouse and so building a body of evidence to present to HMRC.

If you have any questions about any of the issues raised in this article, please contact info@ts-p.co.uk.