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Capital Tax Review by Matthew Hutton, MA, CTA (Fellow), AIIT, TEP

Matthew Hutton MA, CTA (fellow), AIIT, TEP author of Capital Tax Review, comments on the recent decision on Lloyds TSB Private Banking plc v HMRC

Context

A house which had been agreed to attract APR as being ‘of a character appropriate’ to the relevant agricultural land or pasture attracts APR only on its ‘agricultural value’ as defined in IHTA 1984 s115(3). This is the first decision of the Lands Tribunal on the ‘agricultural value’ of a farmhouse.

Lloyds TSB Private Banking plc v HMRC: the facts

Dr Nuala Brice had held that Cookhill Priory attracted APR (Lloyds TSB v IRC [2002] STC (SCD) 468) (see CTR Issue No 1 (Winter 2003) Item 10). The valuation provision in s115(3) requires ascertainment of ‘the value of the property if the property was subject to a perpetual covenant prohibiting its use otherwise than as agricultural property’.

HMRC argued that the agricultural occupancy restrictions imposed under planning permissions were the equivalent of such a presumed covenant, given the absence of direct evidence. By contrast, the taxpayer argued that the farmhouse could be occupied by anyone who farmed the surrounding land from the farmhouse, whether or not they are engaged in agriculture – and this could include so-called ‘lifestyle buyers’.

Malcolm Hawkesford FIRCS, as a practising chartered surveyor and a potential purchaser of Cookhill Priory, was asked what would have been the effect on his interest if the house had been subject to a s115(3) covenant. He said that, so long as he would have been free both to farm the land and to carry on his business at his offices in the area, he did not think that the covenant would have affected his offer. If the property had been subject to an agricultural occupancy condition, however, he would not have been interested as he could not have complied with it. His major source of income had to be from his work with his existing firm. [This evidence in para 23 of the decision is surely crucial, but seems to have been disregarded.]

Expert evidence was given to the taxpayer by Clive Beer, a Director of Savills, and for HMRC by Timothy Swallow employed by the VOA.

What is a farmhouse?

The Tribunal disagreed with Mr Beer’s assumption that Cookhill Priory would remain a farmhouse if purchased by someone who carried on a farming business on the land, even though he might spend very little of his time actively engaged in the business – someone characterised by Mr Beer as a ‘lifestyle farmer’. The Tribunal said at para 49: ‘A farmhouse is the chief dwelling house attached to a farm, the house in which the farmer of the land lives. There is, we think, no dispute about the definition when it is expressed in this way. The question is: who is the farmer of the land for the purpose of the definition in section 115(2)? In our view it is the person who lives in the farmhouse in order to farm the land comprised in the farm and who farms the land on a day to day basis. It is likely, although it may not necessarily always be the case, that his principal occupation will consist of farming the land comprised in the farm. We do not think that a house occupied with a farm is a farmhouse simply because the person living there is in overall control of the agricultural business conducted on the land; and in particular we think that the lifestyle farmer, the person whose bid for the land is treated by the appellant as establishing the agricultural value of the land, is not the farmer for the purpose of the provisions. There are a number of pointers that suggest that this is the correct view.’

The Lands Tribunal found three ‘pointers’ in support of their finding:

(i) The qualification in the sub-section that the farmhouse must be ‘of a character appropriate to the property’. If the property were indeed such that it could be expected to be occupied by a lifestyle farmer, what character of house would be appropriate and how would this be determined? The Tribunal thought that the correct approach is to seek some commensurateness between, on the one hand, the land as agricultural land (and in particular the nature of the agricultural operations on it and its profitability) and, on the other hand, the house; if this is so, it can only be because the concept of the farmhouse is as the dwelling of a working farmer who requires a suitable house to support his working life.

(ii) The development of the legislative provisions since the introduction of Estate Duty in 1894 had seen their progression from a relief for country estates to one for working farms. Particular significance was attached to the exclusion of ‘mansion houses’ from the definition of ‘agricultural property’ on the introduction of CTT in 1975, so emphasising in the Tribunal’s view ‘the operational components of agricultural units’. [The Tribunal’s view seems to ignore the substantial changes made to the CTT provisions in 1976 and 1981 and the final abolition of the concept of the test for working farmer relief in 1984 which could be seen to reverse the trend found.] The exclusion of mansion houses was seen as excluding those occupiers who might perhaps be in overall control of the farming but were not undertaking it on a day to day basis.

(iii) The fact that cottages and farm buildings also attract relief under Part 3 of the definition of ‘agricultural property’ was thought to support the Lands Tribunal’s view of the concept of the farmhouse as the dwelling of the person who manages the farm on a day to day basis.

[This conclusion now looks more restrictive than what is said in HMRC’s Inheritance Tax Manual at IHTM 24047 which, after referring to Whiteford (the place from which farming operations are conducted) and Rosser (the dwelling from which the farm is managed), states ‘unless farming operations or management are conducted at the property it cannot be a farmhouse’. The Lands Tribunal decision appears to turn more directly on operations than on management.]

Effect of agricultural occupancy condition

Having determined the meaning of farmhouse the Tribunal then considered that an occupancy restriction was less restrictive than a s115(3) covenant on three grounds:

(i) The standard form of the restriction is not connected to the occupation of any land, while for s115(2) purposes the farmhouse must be of a character appropriate to the agricultural land of the deceased.

(ii) The occupancy restriction includes retired farmers and workers. This led the Tribunal to suggest that, once accepted as such, a farmhouse could remain a farmhouse after the death or retirement of the working farmer.

(iii) An occupancy restriction can be lifted by the local planning authority.

The Tribunal concluded that the agricultural value of the land falls to be determined on the assumption that the s115(3) perpetual covenant would have prevented its use other than in this way. This would have excluded, therefore, the lifestyle purchaser whose principal reason for living in the house was the amenity afforded by it and by the land.

Conclusions on value

The Tribunal had seen no evidence of farmhouses sold on the open market subject to a s115(3) covenant ‘and we imagine that none exists’. The dismissal of the taxpayer’s lifestyle buyer evidence meant that there was only HMRC evidence before the Lands Tribunal.

The agricultural occupancy condition dwellings submitted were not directly comparable to Cookhill Priory, having little or no land, and the IHT agreement submitted in a case where one was agreed did no more than show that the market value of a farmhouse could be reduced for s115(3) purposes. Only one case was found to be directly comparable to Cookhill Priory and showed a discount of 33.4%. The decision does not refer to any of the circumstances which might have led to an agreement, but rather uses it to support HMRC’s case for a 30% reduction from market value.

However, the Lands Tribunal did consider the alternative position should lifestyle buyer evidence be eligible. The Tribunal did not find that such buyers sought the taxation advantages seen by the taxpayer, while the covenant would not add to the qualities of the property. The value on this basis was determined to be a 15% discount.

(Lloyds TSB Private Banking plc v HMRC DET/47/2005, decision issued 10 October 2005)

Comment

The decision is now final. Subject to future higher judicial authority, this decision on the meaning of ‘farmhouse’ may have adverse implications for the following categories of landowner:

• estate owners who employ farm managers to run their own farms;

• elderly farmers who may have been genuine ‘working farmers’ for many years but who have now retired or semi-retired. The day-to-day farming is now done by farm managers, contractors or even partners;

• farmers operating through contractors retaining little involvement in the day-to-day farming operations; and

• farmers whose main source of income is outside agriculture, whether those who need other sources of income to give them and their families a decent income or those whom Antrobus No 2 calls ‘lifestyle farmers’, viz those whose main source of earnings are from non-agricultural sources.

Meanwhile, a number of words of caveat may be sounded (drawn from an excellent article by Adrian Baird in Country Landowner of January 2006):

1. A court may hold in future that the finding of the Lands Tribunal on the meaning of ‘farmhouse’ may be an ‘obiter dictum’ and not part of the ‘ratio decidendi’ (that is, a peripheral observation and not part of the main decision), especially as the Lands Tribunal’s remit concerns only issues of valuation.

2. The narrow construction of a farmhouse is difficult to reconcile from what Lord Upjohn said in Korner in the House of Lords suggesting that a farmhouse should be judged ‘… in accordance with ordinary ideas of what is appropriate in size, content and layout, taken in conjunction with the farm buildings and the particular area of land being farmed, and not part of a rich man’s residence …’.

3. It might be argued that there is a conflict between what Dr Brice the Special Commissioner had said in Antrobus No 1 and Antrobus No 2 decided by the Lands Tribunal. Although Miss Antrobus was a working farmer, she may not have needed to live in Cookhill Priory to support her working life.

4. Even as a valuation case, the 30% discount was based on very limited factual evidence of just one supposedly comparable property. In other cases real factual evidence may be produced to suggest that something other than a 30% discount should be employed. There could even be real evidence in other cases that a ‘lifestyle farmer’ has bid for a particular property at or near its market value in circumstances where he or she intends to occupy the property as a farmhouse – even though the farming operations may not be the buyer’s major source of income.

All this leads to considerable uncertainty. The main point is not necessarily to assume, until the judicial dust settles somewhat, that Antrobus No 2 is the last word on the subject.

January 2006

Matthew Hutton

More Information

The above article has been taken from Matthew Hutton’s Capital Tax Review, a quarterly update for professional advisers of private clients. For more information, visit http://www.taxationweb.co.uk/books/capital_tax_review.php.

About the Author

Matthew Hutton is a non-practising solicitor (admitted 1979), who has specialised in tax for over 25 years. Having run his own consultancy (latterly through Matthew Hutton Ltd) until 30th September 2000, he now devotes his professional time to writing and lecturing.