Each month solicitors Thomson Snell & Passmore will be answering frequently asked questions from across the practice. This month, it is Helen Stewart, Partner and Head of Probate, has answered two common issues surrounding agricultural property relief (APR).
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Q: What is agricultural property relief (APR)?
A: APR is a hugely valuable inheritance tax relief for qualifying agricultural property used for an agricultural purpose. It is typically claimed at 100% or 50%.
The latter rate tends to apply to tenancies granted under the old Agricultural Holdings Act. There is also minimum ownership periods that apply depending on whether the deceased farmed the land in hand or through a third party tenant.
Most claims for this relief come under close scrutiny and challenge from HMRC which means that the personal representative has to provide detailed evidence about farming activities, satisfying the character appropriate test for farmhouses, use of the farmhouse, farm buildings and land. It is not uncommon for HMRC to ask for third party statements to substantiate farming activities and who they have been carried out by.
Q: Which farming asset is likely to come under most scrutiny?
A: Unequivocally it will be the farmhouse. This asset tends to be the most valuable and therefore most likely to be challenged. There are numerous case law decisions around the farmhouse and the three main areas that need to be considered are as follows:
1. Character appropriate
HMRC adopt the approach that you will recognise a farmhouse when you see it; this is known as the elephant test.
Typically it will be central to the farming operation and be of modest size and appearance. The farmhouse will often be where the farming operation is managed from, so the farm office and decision making and instructions to farm staff will be given at the farmhouse.
A large mansion in modest grounds is unlikely to qualify but land with a farmhouse is likely to qualify.
2. Use of the farmhouse - who has to occupy it and for what purpose?
This is an area that can cause real difficulty especially when a farmer becomes elderly and physically unable to farm the land themselves.
- If the farmer (the land owner) occupied the farmhouse and worked the land in hand or by giving direction to others then HMRC are usually satisfied that relief should be available. In some cases though for an elderly farmer who had not physically carried out the farming activities HMRC will seek to deny relief unless it can be proved that the farmer gave the direction for the farming activities and that they were not left with someone else to make the decisions.
- The land owner does not necessarily have had to occupy the farmhouse. A tenant farmer can occupy it instead, provided the tenant had worked the land and directed the day to day activities. Relief will then be available on the land owners estate provided it meets the ownership period.
- Relief is denied though when the tenant farmer carried out the farming activities but did not live in the farmhouse but the land owner who owned the farm did.
3. How will the agricultural value of the farmhouse be calculated?
It is important to use an agricultural valuer who is used to working with the HMRC district valuers. The agricultural value tends to be between 60% to 75% of the open market value.
APR is restricted to the agricultural value of the farmhouse which is the value of the property should it be subject to planning restrictions that would allow occupation only by someone involved in agriculture.
This short article has focused on a very narrow part of agricultural property relief. There are other areas that should equally be considered and which we are able to advise on.
If you would like to discuss the issues detailed above please contact Helen Stewart, Partner & Head of Probate on 01892 510000.
This article was first published in Times of Tunbridge Wells on Wednesday 6th May 2015.