Keeping it in the Family

Alison Graham-Wells

St John’s Chambers

“What between the duties expected of one during one’s lifetime,

and the duties exacted from one after one’s

death, land has ceased to be either a profit or a

pleasure”

KEY POINTS

APR = Agricultural Property Relief

BPR = Business Property Relief

APR is not just business relief for farms

There is an interaction b/n APR and BPR and both may be available

Beware Grannies in the Attic

STARTING AT THE BEGINNING

THE INHERITANCE ACT 1984

• APR - Ss 115 - 124C

• BPR - Ss 103 - 114

FINANCE ACT 1986

• Reservation of Benefit - s102 and Sch 20

Contrary to Lady Bracknell’s opinion, the aim of the inheritance tax regime is to keep most family run businesses “in the family”

Without APR and/or BPR the business/assets would have to be sold to pay IHT

It is unusual to be involved in a claim for APR without a linked claim for BPR

APR

Not just business relief for farms

applies only to agricultural land and buildings occupied with that land

applies only where the land and buildings have been “occupied for agriculture”

applies only where owned and occupied for a minimum period - 2yrs

takes only the “agricultural value” of the land and buildings out of IHT

115 Preliminary. (1) In this Chapter references to a transfer of value include references to an occasion on which tax is chargeable under Chapter III of Part III of this Act (apart from section 79) and—

(a) references to the value transferred by a transfer of value include references to the amount on which tax is then chargeable, and

(b)references to the transferor include references to the trustees of the settlement concerned.

(2) In this Chapter “agricultural property” means agricultural land or pasture and includes woodland and any building used in connection with the intensive rearing of livestock or fish if the woodland or building is occupied with agricultural land or pasture and the occupation is ancillary to that of the agricultural land or pasture; and also includes such cottages, farm buildings and farmhouses, together with the land occupied with them, as are of a character appropriate to the property. (3) For the purposes of this Chapter the agricultural value of any agricultural property shall be taken to be the value which would be the value of the property if the property were subject to a perpetual covenant prohibiting its use otherwise than as agricultural property (or, in the case of property outside the United Kingdom, the Channel Islands and the Isle of Man, if it were subject to provisions equivalent in effect to such a covenant) (4) For the purposes of this Chapter the breeding and rearing of horses on a stud farm and the grazing of horses in connection with those activities shall be taken to be agriculture and any buildings used in connection with those activities to be farm buildings. (5) This Chapter applies to agricultural property only if it is in—

(a) the United Kingdom, the Channel Islands or the Isle of Man, or

(b) a state, other than the United Kingdom, which is an EEA state (within the meaning given by Schedule 1 to the Interpretation Act 1978) at the time of the transfer of value in question.

“Agriculture”

Not defined in IHTA

• except at s115(4) which treats “the breeding and rearing of horses on a stud farm” as agriculture for the purposes of APR.

IHTM24061 - The HMRC Manual

• cultivation to produce food for human and animal consumption

• use of land to support livestock kept to produce food for human consumption

• keeping such other animals as may be found on an ordinary farm

• breeding and grazing of racehorses on a stud farm

• land set aside for permanent or rotational fallow

• cultivation of short rotation coppice

“Agricultural Property”

S115(2) IHTA:

• “agricultural property” means agricultural land or pasture and includes woodland and any building used in connection with the intensive rearing of livestock or fish if the woodland or

building is occupied with agricultural land or pasture

and the occupation is ancillary to that of the agricultural land or pasture; and also includes such cottages, farm buildings and farmhouses, together with the land occupied with them, as are of a character

appropriate to the property.

Woodland on its own will not qualify

• but might qualify for BPR

• deferral of the value of growing timber

A building used for intensive rearing of animals will not qualify if no land is occupied with it

but might qualify for BPR

Farm buildings, including farmhouse and cottage will not qualify unless “of a character appropriate” to farmland which is in the same occupation

Land used for horses does not qualify unless:

• is part of a stud farm

• the horses are used for agricultural purposes, or

• they are being farmed for meat

other equine businesses may qualify for BPR

A little more detail

“of a character appropriate”

“Agricultural Relief …provides an exemption for farmhouses, which anecdotal evidence suggests provides a cover for a large number of country cottages, “fake farmhouses”, to be passed on tax free. At the least, it may be desirable to tighten the definition of agricultural property to close this loophole.” “Fair Dues - Towards a more progressive inheritance tax”

Dominic Maxwell - August 2004 - The institute for Public Policy Research

Perhaps the most troublesome concepts in APR

APR is all or nothing

Even if a claim to APR succeeds, victory may not be total - relief if restricted to “agricultural value”

When is a farmhouse not a farmhouse?

• The “elephant test”

• you know it when you see it

When it is a fine house with a bit of land

• “Lifestyle farming”

• The farmer who “gets old”

The “Antrobus” checklist:

• Is the house appropriate, by reference to its size, content and layout, to the farm buildings and the particular area of farmland being farmed?

• Is the house proportionate in size and nature to the requirements of the farming activities conducted in the agricultural land or pasture in question?

• Is the subject property “a family home of some distinction”?

• Would an educated rural layman regard the property as a house with land or as a farm?

• How long has the house in question been associated with the agricultural property? Was there a history of agricultural production?

Further detail

“in the same occupation”

There must be a nexus between the agricultural property and other agricultural land or pasture

Ownership v Occupation

HMRC v Hanson [2013] UKUT 0224

• A landmark case

• Determined that beneficial and other interests in land is as good as legal ownership for the purposes of IHT and APR

• here common ownership following lifetime gifts of land

Whether owned or occupied, it must be for the purposes of agriculture

• ie by an individual actively involved in farming activities

Cottages

Must be occupied by a farm worker

Unlike farmhouses can be occupied by

• retired farm employee or

• surviving spouse/civil partner if

• the occupier is a statutory protected tenant, or

• the occupation is under a lease granted to the worker for their life and that of the surviving spouse/civil partner as part of their employment contract

Lifetime Gifts

7 years survival

If less than 7 years value is added back and APR will be available if:

at date of gift the property qualified for APR;

The property was owned by the transferee from date of transfer to date of death of the transferor;

not subject to a binding contract for sale; and

at date of death it is still agricultural property and has been occupied for agricultural purposes throughout

Timing is critical

117 Minimum period of occupation or ownership.

Subject to the following provisions of this Chapter, section 116

above does not apply to any agricultural property unless—

(a) it was occupied by the transferor for the purposes of

agriculture throughout the period of two years ending with the

date of the transfer, or

(b) it was owned by him throughout the period of seven years

ending with that date and was throughout that period occupied

(by him or another) for the purposes of agriculture.

Minimum period of ownership and/or occupation:

• occupied the property for agricultural purposes for the 2 yrs immediately before transfer; or

• owned it for the 7 yrs immediately before transfer and throughout that time it was occupied (by transferor or others) for agricultural purposes.

If inherited - ownership/occupation runs from date of death of the previous owner.

If a spouse or civil partner inherits, relief runs for any period which the deceased owned or occupied it

these conditions are much tighter than the equivalent for BPR

Sighs of Relief

S116 sets out the relief available and the rules for determining it, briefly:

100% available if:

• At date of transfer, transferor has right of vacant possession or could obtain it within the next 12 months, or

• Land is let on grazing licence, or

• Property is let on a tenancy beginning on or after 1 September 1995, or

In all other circumstances, relief is reduced to 50%

100% of what?

Relief is only available on the “agricultural value” of the property.

• s115(3) ITHA

For the purposes of this Chapter the agricultural value of any agricultural property shall be taken to be the value which would be the value of the property if the property were subject to a perpetual covenant prohibiting its use otherwise than as agricultural property (or, in the case of property outside the United Kingdom, the Channel Islands and the Isle of Man, if it were subject to provisions equivalent in effect to such a covenant)

Specialist valuation may be in order when calculating IHT

Does not include any development value or value attributable to mining rights etc

APR ROUND UP

IS THE LAND BEING USED FOR AGRICULTURAL PURPOSES?

ARE THE BUILDINGS BEING USED FOR AGRICULTURAL PURPOSES?

IS THERE AN ACTIVE FARMER LIVING IN THE FARMHOUSE?

IS THERE A TENANT - WHEN WAS THE TENANCY CREATED?

IS THERE DEVELOPMENT POTENTIAL?

IS THE AGRICULTURAL VALUE SIGNIFICANTLY LOWER THAT THE OPEN MARKET VALUE OF THE FARMHOUSE?

IS BPR AVAILABLE WHERE APR IS NOT?

BPR

Is there a business?

Qualifying and non-qualifying activities

• Letting of Farm Property

• Caravan Sites

• Grazing Licences

• Holiday Lettings

• Serviced Business Lettings

• Property Developers

Hybrid Businesses

• All or nothing test

• Wholly or mainly test

Granny in the attic? aka

Reservation of Title

In summary, if possession and enjoyment of the

gift is not bona fide assumed by the donee at or

before the beginning of the “relevant period” or if

at any time during the relevant period the gift is not

enjoyed to the entire exclusion, or virtually to the

entire exclusion, of the donor then the gift will be

one in which the donor has reserved a benefit.

Dealing with HMRC

Austerity Measures

Easy targets

Valuations from experts in agricultural property

Highlight any areas of doubt

Sound them out

Ask me!