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Matthew Hutton MA, CTA (fellow), AIIT, TEP considers the latest decision on the issue of farmhouses for Agricultural Property Relief purposes, in Arnander, Lloyd and Villiers (executors of McKenna and another, deceased) v HMRC

Context

The latest farmhouse case to come before the Special Commissioner, in this case Dr Nuala Brice, had what might be generously described as ‘unpromising facts’.  Not surprisingly Dr Brice thought that the house in this case was not even a farmhouse.  Although she went on to consider the ‘character appropriateness’ test, it was not required for the purposes of the decision.  I trust that this case will not be appealed, leaving the way open for a more sensible case to find its way to the High Court or above for judicial pronouncement to be applied on the relevant test. 

Arnander, Lloyd and Villiers (executors of McKenna and another, deceased) v HMRC: the facts

Mr and Mrs McKenna owned a country estate in Cornwall consisting of their residence, the main house with six acres of gardens and domestic outbuildings (‘the house’), and 187 acres of land, most of which was farmland. The house, which was of medieval origin, had became dissociated from the farming activities on the estate in 1908 when a new farmhouse was built and let, with the farmland and farm outbuildings, to tenant farmers. In 1984 the tenant farmer surrendered his tenancy and Mr and Mrs McKenna decided to enter into contract farming arrangements for arable farming. They employed a land agent who was responsible for the management of the land, the farming activities, the invoicing of the contractors and all discussions with the contractors. The agent had approximately five meetings a year with Mr McKenna, sometimes informally, to discuss farm matters either by telephone or in the house. Mr McKenna personally prepared and kept meticulous documents and records of the arrangements and paid income tax under Schedule D. In 2003, after a prolonged period of ill health, Mr and Mrs McKenna died within five months of each other. In 2004 the estate was sold, as a residential property, for £3,050,000.

The three executors of Mr and Mrs McKenna’s estate (‘the appellants’) sought to obtain agricultural property relief from IHT in respect of the house. Although HMRC allowed relief in respect of 110 acres of land and one farm outbuilding, they issued notices of determination denying relief on the house on the grounds that it was not an interest in agricultural property within the meaning of IHTA 1984 s115(2). 

The appellants appealed and the following issues arose for consideration:

(1) Whether the house (with its gardens and domestic outbuildings) was a farmhouse within the meaning of s115(2). The appellants contended that the house was the dwelling of the owners of the farm and the place from which the farming business was managed. They were in charge of the direction of the farming business; they directed the contractors through their agent; they maintained the business and tax records at the house and also had meetings with the agent to discuss farm policy there. HMRC argued that a farmhouse was a building with a particular function and in each case it was necessary to look at the function of the house performed in relation to the agricultural land. The occupant of the farmhouse had to be someone who could be called a farmer and who lived in the house in order to farm the land on a day-to-day basis.

(2) If the house was a farmhouse, whether it was, as the appellants argued, ‘of a character appropriate to the property’ within the meaning of s115(2).

(3) If so, whether the house was occupied for the purposes of agriculture throughout the period of two years ending with the relevant dates of death within the meaning of s117(a). The appellants contended that Mr and Mrs McKenna had been in occupation of the farmland for the purposes of agriculture and of the house as a farmhouse for the purposes of agriculture. The fact that the contractors undertook the day-to-day farming activities was a sensible feature of their farm operation given their age and strength. HMRC argued that, as the house was not a farmhouse of a character appropriate to the property, the issue did not arise.

(4) Whether the farm outbuildings were occupied for the purposes of agriculture throughout the period of two years ending with the relevant dates of death within the meaning of s117(a). The appellants submitted that all the farm outbuildings were used or kept ready for use predominantly for the purposes of the storage of farm machinery and utilities and were not used for any non-agricultural purposes.

The decision: SpC (Dr Nuala Brice)

The house (with its gardens and domestic outbuildings) was not a farmhouse within the meaning of IHTA 1984 s115(2). 

In determining the correct interpretation of the word ‘farmhouse’ for the purposes of IHTA 1984 s115, Dr Brice began by deriving the following legal principles from the authorities. A farmhouse was a dwelling for the farmer from which the farm was managed; the farmer of the land was the person who farmed it on a day-to-day basis rather than the person who was in overall control of the agricultural business conducted on the land; the status of the occupier of the premises was not the test, but the proper criterion was the purpose of the occupation of the premises.  However, if the premises were extravagantly large for the purpose for which they were used, or if they had been constructed upon some more elaborate and expensive scale, it might be that, notwithstanding the purpose of occupation, they should be treated as having been converted into something much more grand; and the decision as to whether a building was a farmhouse was a matter of fact to be decided on the circumstances of each case and was to be judged in accordance with ordinary ideas of what was appropriate in size, content and layout, taken in conjunction with the farm buildings and the particular area of farm being farmed.

Dr Brice then considered the factual context in the present case. Between 1908 and 1984 the house, as the appellants accepted, was not a farmhouse and in 1984 the tenant farmer surrendered his tenancy. From that date, day-to-day farming activities were conducted by contract farmers who were managed by the agent; Mr McKenna had discussions with the agent at the house which was also used to prepare and keep the farm accounts and other farm records; he received the payments from the contract farmers through the agent's firm and paid income tax under Case 1 of Schedule D on the profits. Applying the law to the facts, Dr Brice found that the house was not the main dwelling from which the agricultural operations over the land were conducted and managed. The day-to-day management and all acts of farm husbandry over the land were solely the responsibility of the contractors who were managed by the agent. The engagement of an agent to manage the land meant that the use of the house for farming matters was very much reduced.

If the farmer of the land was the person who farmed it on a day-to-day basis rather than the person who was in overall control of the agricultural business conducted on the land, it followed that Mr McKenna was not the farmer. The purpose of his occupation of the house was not to undertake the day-to-day farming activities. In any event, the house was larger, grander, more elaborate and more expensive than was required for the reduced farming purposes for which it was in fact used. Its size, content and layout, taken in conjunction with the farm buildings and the particular area of farm being farmed, pointed to the conclusion that it was primarily a rich man's residence rather than a farmhouse. It followed that the house (with its gardens and domestic outbuildings) was not a farmhouse within the meaning of IHTA 1984 s115(2).

Although it was not therefore necessary to consider issues (2) and (3), Dr Brice went on to express her views. In relation to issue (2), it was not appropriate to compile an exclusive list of relevant factors to consider when deciding whether a farmhouse was of a character appropriate to the agricultural land for the purposes of s115(2). The question was one of fact and degree and any factor could be relevant. The relevant factors in the current appeal were: the historical associations; the size, content and layout of the house; the farm outbuildings; the area being farmed and whether the house was proportionate to the land being farmed; the view of the educated rural layman; and the relationship between the value of the house and the profitability of the land.

Dr Brice concluded that the house was not used as a farmhouse between 1908 and 1984 and thereafter its use for farming activities was very much reduced because of the use of an agent and the contract farming arrangements. The house was at the very top end of the size of farmhouses in Cornwall and farms with a house that size had more agricultural land. The house was sold as a large country house with farmland and not as a farm with a house. The value of the house was well out of proportion to the profitability of the farm. Accordingly, if the house was a farmhouse, then it was not ‘of a character appropriate to the property’ within the meaning of s115(2).

In light of her conclusions on issues (1) and (2), Dr Brice determined that the house (with its gardens and domestic outbuildings) was not occupied for the purposes of agriculture throughout the period of two years ending with the relevant dates of death within the meaning of  s117(a). Even if the house had been found to be a farmhouse of a character appropriate to the property, it was clear that Mr and Mrs McKenna were not able to engage in farming matters throughout the period of two years ending with the relevant dates of death.

Lastly, on issue (4), after reviewing the evidence, Dr Brice found that three of the farm outbuildings were occupied for the purposes of agriculture between 1991 and 1993 within the meaning of  s117(a), and eight outbuildings were not.
The appeals on the main issues were dismissed.

(Arnander, Lloyd and Villiers (executors of McKenna and another, deceased) v HMRC SpC 565 23.10.06 reported at [2006] STI Issue 45)

Comment

As I understand, this case is not going to appeal, which must be a good thing.  Indeed, it is unfortunate that it was ever taken by the Executors to the Special Commissioner in the first place.  The facts might be described, at best, as ‘unhelpful’.  Although only at Special Commissioner level, the pity is that Dr Nuala Brice seems to have taken the opportunity to tighten somewhat her views on the application of the ‘character appropriate test’ and, more significantly, to reiterate the Lands Tribunal dictum in para 49 of their ruling in Antrobus No 2 (see CTR No 14 Spring 2006 Item 5), to the effect that the farmhouse is the residence of the person who farms the land on a day-to-day basis and not that of the person who is in overall control of the agricultural business conducted on the land.

The hope is that, pending some sensible guidance from at least the High Court on the meaning of ‘farmhouse’ for APR purposes, we shall get an agreed statement of principles as between the CLA and HMRC before too long.

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, click here.