Introduction
Margaret Thatcher was anxious to ensure that if you were lucky, worked hard all your life, able to buy your own house, you should be able, up to a value, to pass that benefit on to:
- your married partner or spouse
- your children or
- a Charity.
The relief was always a partial relief for many intended to benefit the common man.
From the girl who started life above the shop, there was equally in her plan qualifying relief through Agricultural Property Relief (“APR”) and Business Property Relief (“BPR”).
In the years which followed the Inheritance Tax Act 1984 Section 8, plans extended to accommodate:
- the passage from property of first partner to pass to surviving partner, so as to avoid the use of the discretionary trust arrangements and
- the concept of marriage.
But the real and true value has not been linked to property values.
Since April 2017, whilst the Inheritance Tax Act 1984 Section 8 remains the main Section (there have been additions), we end up with:
- a Nil Rate Band or “NRB”. Currently £325,000. If that is not used up by the first to die, then it can pass to the surviving partner and so to the next generation with a total of £650,000 and
- an additional Residence Nil Rate Band “RNRB” currently £175,000. This relief applies to one house which must be a “qualifying residential interest” (or QRI).
If a person’s estate exceeds £2,000,000 the RNRB is reduced by £1 for every £2 above £2,000,000. There is “taper relief”, so the relief deteriorates to zero by £2,700,000 million pounds. Generally, this poses a problem for those with a special home in the countryside or by the sea.
For the majority married or in a recognised civil partnership, each spouse and under the current allowances have:
NRB £325,000
RNRB £175,000
________________
Total £500,000
If first to pass has not claimed or used up any of their allowance by their activities prior or disposition on death, then there is no tax payable on first to die, only on second death with currently a total allowed relief of £1,000,000.
Example A
Janet and John are married with one home and savings comprising a total of £1,200,000. John predeceases. The Revenue need to be told but there is no tax payable. When Janet dies (and in this example the allowances and assets remain the same) her estate can use the two allowances and so £1,000,000 is relieved. £200,000 is not. This will be subject to IHT currently 40% and so an £80,000 tax.
Not quite what Margaret intended in 1984 but the problem is reflected by increased property prices and allowances which have not kept pace with them.
Applying the Rules
It is open to any of us to make tax efficient transfers in our lifetime, subject to taper and potentially exempt transfers (“PET’s”). We can also keep assets out of our calculable estate. That happens with pension funds and life policies which are written in trust. Then, of course, those living above the shops still or on the farm there is APR and BPR. The programme of tax assessment to see if APR applies, if the estate is not fully saved. Whether BPR can be claimed. Leaving the NRB and RNRB until last hoping that the three when taken together will reduce the tax to a manageable amount.
The Farmhouse
Often referred to as the elephant in the room [Dixon v. IRC].
There are three starting points:
- consider if the farmhouse is a farmhouse [Antrobus – see below]
- occupied for the purpose of agriculture for the required period. That is at least two, sometimes seven years depending on ownership
- be of a size and character appropriate to the agricultural land. Therefore, size and type of the holding.
If it qualifies relief is for the agricultural value, not open market price. That is, if you pass both tests, be aware that the relief is only based on “agricultural value”, not “market value”. You still have to pay tax on the difference (unless it is otherwise subject to some other relief) [McCall & Another (PR’s of McClean (deceased) v. Revenue & Customs [2008] ST (SCD) 752]. The definition of “market value” is defined in Section 160 IHTA as:
“the value at any time of any property shall for the purposes of this Act be the price which the property might reasonably be expected to fetch if sold in the open market at that time, but that price shall not be assumed to be reduced on the ground that the whole property is to be placed on the market at one and the same time”.
Agricultural value is defined by Section 115(3) IHTA as:
“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”.
The leading case (and used by HMRC) on this is Lloyds TSB (PR of Antrobus dec’d) v. I.R. Capital Taxes (No. 2) [2002] STC 483 (see below).
In some cases the APR will not be enough and every penny of the NRB and RNRB will be required. Others illustrate the advantage of APR.
Example B
APR though remains an important relief in comparison with those working in a town. Take Janet and John, this time farmers in an accepted farmhouse. Ignoring the APR and BPR on the farm itself. Taking just the house.
John dies first. Unless he used up allowances they pass on his death to Janet. No tax payable on first death. On Janets death as a working farmer in the farmhouse. The house is worth £2 million with no mortgage or debts.
Her estate first seek APR. That applies but the open market is reflected by APR deducting 30% of open value. So, 30% of the £2 million = £600 not relied by APR. You then apply the two unused personal reliefs, so £1 million. Result no IHT.
Using Cases
Reported cases provide illustrations, lessons and comparables, although each is about the facts in that case and how that case has been argued. I refer to some of the main cases below to reflect the application of the rules on that basis.
Eight Tests of the Elephant
There is under Section 115 the definition of agriculture but no specific definition of farmhouse. The cases and the Revenue have, therefore, usually looked at eight connected questions. None are mutually exclusive but when taken together produce an answer. I have repeated most of the main cases to date in what follows. The questions are:
- Is it a farmhouse by reference to its size? [Antrobus]
- Is that size appropriate to the holding?
- Is the house ancillary to the farm or the farm ancillary to the house?
- If you rode past that house, does it look like a farmhouse to you or say a lodge or grange? [Dixon v. IRC]
- One required as such for the holding around it?
- How long has that building been associated with the land?
- What is the relationship between the value of that house against the profitability of the holding? You are allowed to make a loss in farming. You can live in a mansion with twenty acres but cannot claim that to be a farm.
- Has it in fact lost its status and become a retirement home? [Rosser v. IRC].
Applying the Tests
The relief in many rural, coastal or popular areas will not stop the need to consider trusts or hoped for methods to reduce tax or a wish to transfer or gift property at least seven years before death (see below).
Nor may the reliefs entirely protect the larger farmhouse from tax.
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 principal 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. HMRC and the Land Tribunal agreed it had an agricultural value of £425,932 (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 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”.
When is the assessment whether it is a farmhouse to be made? That became an issue in Rosser v. IRC [2003] STC (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 Section115 (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] UKWT 506] below.
Following a serious 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 late M. Higginson has bought the Lodge in 1954. Whilst there was 63 acres of arable or grassland, the rest was lake or woodland or wetland and 3 acres of garden, included 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 cases of Arnander & Others (Executors of McKenna dec’d) v. R & C Commissions [2006] STC (SCD) 800 and Antrobus No. 2 (Lloyds TSB Bank PR’s of Antrobus) v. Twiddy [2006] 1 EGLR 157 which is responsible for the phrase “the dirt under the fingernail” test of the deceased farmer. In Antrobus the questions were:
- was the Grade II Listed Building a farmhouse at all and
- it at the time of death occupied by a farm?
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 into 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 into 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.
Of the cases mentioned above and those excluded, the outcome is that:
- if there is a farmhouse APR and/or BPR should apply [IHT 1984 Section 114]
- 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)
- the relief for APR will be as a farmhouse (Antrobus) but
- only if occupied as a farmhouse by a farmer [Atkinson and Arnander].
Conclusion
The modern law has changed very little. It is its application and effect which has changed.
In my next section I will refer to the larger farm business which includes the farmhouse. With that the need for dovetailing and consideration of a diversified holding.
David Hassall LLM MSc
19 June 2023
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