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A. Background

1. It is said there are two certainties in life:

(a) death and

(b) tax.

It was the fight between whether the Church or the Crown got most of our money on death which led to the Statute of Uses in 1535. For hundreds of years death operated as the Revenue’s last chance to tax.  For decades this operated through a “death duty” which applied to assets including the house owned before death.  Sometimes forcing a sale of the big house (as in “To The Manor Born”) to pay death duties but the tax also affected the most modest homes making the gift to the next generation proportionally as hard.

2. The Inheritance Tax Act in 1984 changed more than just the word “death duty” to “inheritance tax”.

3. Born and having lived above the shop during her earlier years, Mrs. Thatcher wanted:

(a) for hardworking people to be able to buy their own home even if that was their Council house and

(b) for that house or part of the proceeds of it to be giftable to the next generation.

4. But three problems arose:

(a) the Exchequer needs money and so the original allowance called the “nil rate band”  failed to keep up with property inflation

(b) the requirement that receipts from Council property sales were not to be used for re-builds has had its part in reducing the number of properties available for rent or purchase;

(c) coinciding with a selling and closing of the old Local and District Authority old people’s homes and the transfer of that requirement in to privately paid for accommodation has meant a need for the sale of the family home not for duty but to pay nursing home fees.  This last point is beyond the scope of this work.

5. These problems led to:

(a) the use of the “discretionary trust”  Will where if one partner died first instead of losing his/her nil rate band their interest would be placed in trust.    Although such trusts became widespread they were expensive to operate both for the family and the Revenue.  This led to the Revenue eventually agreeing to allow a survivor to receive his deceased’s partners nil rate band if that had not been used up during the deceased death

(b) the use of the “by pass trust” where a living owner transfers his/her house to the by pass trust in an effort to avoid:

1. inheritance tax and/or

2. nursing home fees and

(c) owners trying to transfer their house before death in an effort to avoid tax or nursing home fees by a lifetime transfer.  Something the Revenue came to treat [Section 3 A IHT] as a “potentially exempt transfer”.  As you have to live for 7 years after gift to make it work, separately something which the Revenue will challenge if there is any deemed attempt to provide or keep a “reservation of benefit”.   In other words, you cannot give your house to your trust or to your family only then to reserve (without paying a proper rent and service charge as if it was a commercial letting) the benefit to still live in the home.

6. After many complaints that in many areas the “nil rate band” was inadequate on the 6 April 2017 Government changes were introduced.  Instead of simply raising the threshold the Government introduced an additional but limited allowance through at least eight changes in the Inheritance Tax Act 1984 and a few less to the Taxation of Chargeable Gains Act 1992.  Though for many the value of the house in their area will still remain a problem.

B. The new regime

7. The now standard death tax rate for inheritance tax remains at 40% unless there is a relief available.

8. The well-known relief for us all under the nil rate band (“NRB”) is currently £325,000 a person or £650,000 a couple remains and is still available.   Of course, the amount can and probably will vary.  The Government introduced a new allowance for those dying leaving more valuable property.   We now have a new term the Residents Nil Rate Band (“RNRB”).  The Chancellor decided to phase in the allowance starting at £100,000 in April 2017 and rising by £25,000 each year to  £175,000 by 2020/21.  As such, by 2021 a married couple will effectively have a combined tax-free allowance of £1,000,000. From then unless there is a change it will be indexed [see what is now Inheritance Tax Act 1984 Section 8 D (v) and (vi)].

9. Just like the NRB to prevent those discretionary trust deeds and Wills all over again the new RNRB transfers automatically to the surviving spouse unless the first to go provides otherwise.

10. But this new additional relief only applies to the house not (for example) the invested net proceeds of sale of the house.  So enters another new definition the “Qualifying Residential Interest” (“QRI”).  Defined as the deceased dwelling.  Only one.  So if the deceased owns more than one his personal representatives can make a choice but the relief only applies to one.

11. Although in many areas the £1,000,000.00 will not go far enough.   The QRI will extend not just to the house but also a limited amount of land around and used by the house or as “occupied and enjoyed with [a dwelling] as the garden or grounds” [see Inheritance Act now Section 8 (H) (5)].  Like Council Tax it remains to be seen how much land will fall under this relief.  Some suggest it will be treated the same as the 0.5 ha of garden or grounds like the treatment of capital gains tax (“CGT”) under the CGT Act Section 221 [Section 222 and 222 (2)].   But in my area it will still be more the point will £1,000,000.00 ever be enough?

12. But both reliefs, that is NRB and now RNRB are not exclusive.   So if the house also qualifies under Agricultural Property Relief (“APR”) or Business Property Relief (“BPR”) they may also be claimed.

13. Back to just the new RNRB there is another new definition although it is more generous than you may think.   The new relief or RNRB has to be claimed by a close related inherited beneficiary [IH Tax Act 1984 S 8 K].  This is defined as a spouse, child or lineal descendent which includes step-children, adopted, fostered or children in law.

14. But that or those beneficiaries must inherit by getting an immediate post-death interest or “IPDI”.  Although this will include disabled persons interests, or derived minors trusts or those trusts set up for beneficiaries who may not (the deceased’s wish) inherit immediately either because they are under 18 or in a trust where they will not take an absolute interest immediately but between 18 – 25.

15. But this new RNRB applies for houses or homes.   If you downsize there are provisions to enable home owners to downsize whilst still retaining the full residential NRB from the more valuable property which they sold.

16. So this new relief in many rural, coastal or popular areas will not stop the need to consider trusts or other hoped for methods to reduce tax or a wish to transfer or gift property at least seven years before death (see below).

17. Nor does the new relief entirely protect the larger farmhouse.   I have prepared a separate section on APR and BPR.  Each year there are a number of challenged or difficult cases on whether either reliefs apply to the particular farmhouse involved but for those with a farmhouse in question the shorter summary is below.

18. With the farmhouse and APR the first thing to recognise is that whilst a qualifying farmhouse would be entitled to 100% APR relief it is on its agricultural value (often lower than open value).  The principle case remains Lloyds (PR’s of Antrobus) 2002 [STC (SCD)] 468.  Facts = this was a case of two halves and hearings.  It involved Cookhill Priory although it was a farm and farmhouse.   The market value (remember this was in 2002) with its garden was £680,425.00.   HMRC and the Land Tribunal agreed it had an agricultural value of £425,932.00 (although that was believed to be 70% of the market value) but an issue was whether a “want-to-be farmer” would pay more than the agricultural value so whether that should include a “lifestyle” buyer’s price.  It would have increased the agricultural value to £517,000 or 85%.   The decision fell under the operation of Section 115 (3) IHTA 1984.   Essentially the view was that the value of the property would be a like a reduction in the market when there is an agricultural restriction for planning purposes.  Obiter in Antrobus No. 2 it was said of The Priory “a farmhouse is the chief dwellinghouse attached to the farm, the house in which the farmer of the land lives”.

19. When is the assessment whether it is a farmhouse to be made?  That became an issue in Rosser v. IRC [2003] S T C (SCD) 311.  The facts were the deceased was a Mrs. Philips who had farmed with her late husband since 1932.  The holding was 41 acres, a farmhouse and a barn.  They went in as tenants but were able to buy their farm and farmhouse in 1952.  But by the date of death 39 acres of farmland had passed to their daughter.  The farmhouse had become a place for retirement.  The issue was whether it was therefore a farmhouse under Section 115 (2).   It was found that “the prime function of the house [was] as a retirement home”.  The test was what the houses function was “immediately before death” [similar to the later case of HMRC v. Executors of Atkinson [2011] U K W T 506] below.

20. Following a series of cases arguing what is a farmhouse under Section 115 (2) IHTA came Higginson’s Executors v. IRC [2007] STD SCD 483.  This case concerned whether Ballyward Lodge was a farmhouse within the meaning of a sub-section giving rise to what was actually meant by “farmhouse” under the Act.  The facts involved Ballyward Lodge.   By admission a 19th Century Hunting Lodge set in an estate.  The later Mr. Higginson has bought the Lodge in 1954.  Whilst there were 63 acres of arable or grass land, the rest was lake or woodland or wetland and 3 acres of gardens including in this an old gardener’s cottage.  The beneficiary had considered farming the 63 acres of arable and that would have worked.  However, he had been in the Army and had been told that in the remote area he would be a potential target, so the estate decided to sell.  It was sold in 2001 at £1.15 million.  The decision was that the Lodge whilst having some farmland with it was just not a farmhouse within the meaning of Section 115 (2).   It was a Lodge.  That decision paved the way for the 2006 case of Arnander & Others (Executors of McKenna dec’d) v. R & C Commissioners [2006] STC [SCD] 800 Antrobus No. 2 (Lloyds TSB Bank PR’s of Antrobus) v. Twiddy [2006] 1EGLR 157 which is responsible for the phrase “the dirty under the finger nail” test of the deceased farmer.  In Antrobus the questions were (a) was the Grade II Listed Building a farmhouse at all and (b) was it at the time of death occupied by a farmer.   The decision was that both Rosteagre House was not a farmhouse and that at the time of death unfortunately whatever he had done in the past Mr. McKenna was not a farmer before death.  He had retired.  The house was in fact a beautiful Listed Manor House by the sea on the Roseland Peninsula, Cornwall and Mr. McKenna in the last period of his life effectively had retired “it is clear neither Mr. McKenna nor Lady Cecilia were able to engage in farming matters”.  Their role had been limited to providing workers with sherry and cups of tea.  The attempt at a Contract Farming arrangement with those actually working also failed.   Similarly in HMRC v. Executors of Atkinson [2011] UKWT 506, Mr. Atkinson was a farmer and moved in to a bungalow built for him on the farm in 1966.  He had farmed his 195 acres latterly in partnership with his family but by 2002 he was not well enough to do that and had moved in to a care home originally and always hoping to return to his bungalow but he never did.   It did not help the Executors case that his family had gained an exemption from Council Tax between 2002 and 2006 with Mr. Atkinson dying in 2006.

21. Of the cases mentioned above and those excluded the outcome is that:

(1)(i) If there is a farmhouse APR and/or BPR should apply [IHT 1984 Section 114]

(ii) Where the farmhouse has the character of a farmhouse but the house must be a farmhouse within the meaning of IHTA 1984 Section 115 (2)

(iii) But it if is the relief for APR will be as a farmhouse (Antrobus) and

(iv) But only if occupied as a farmhouse by a farmer [Atkinson and Arnander].

22. So the issues of creating trusts or farming trust companies (too large an area for this paper) remain.

23. The above is just a summary intended to help as each case as will be seen from the facts of the cases mentioned is individual and depends on its facts.   This work is a guide and is no replacement for specific advice and should not be taken as such.

David Hassall (david.hassall@hassall.law) or Peter Norris (peter.norris@hassall.law) at Hassall Law Limited are happy to assist if requested.

Telephone (01548) 854878

David Hassall LLM MSc (Distinction)
A Fellow of the Agricultural Law Association

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