Matthew Hutton MA, CTA (fellow), AIIT, TEP comments on HMRC's draft revisions to the section of its Inheritance Tax Manual concerning Agricultural Property Relief.
Context
HMRC released on 19 August 2008, for comment by 30 September 2008, draft revisions to the APR section of the Manual. The main changes are in Section 3 (Agricultural Property), Section 5 (Occupation) and Section 11 (Value and Valuation).
Farmhouses
(i) Draft guidance
Within Section 3 of the draft amendments, HMRC state the following:
"A residence must be either a ‘cottage’ or ‘farmhouse’ to come within the definition of ‘agricultural property’ in s115(2) IHTA.
[For ‘cottage’ see IHTM24045.]
A number of decisions have impacted on our view of what a ‘farmhouse’ for the purposes of s115(2) is. Among the most important are:-
CIR v John M Whiteford and Son [1962] TR 157, in which it was stated that ‘a farmhouse is the place from which the farming operations are conducted’
Rosser v IRC [2003] WTLR 1057, in which the Special Commissioner concluded that ‘it must be a dwelling for the farmer from which the farm is managed.’
Lloyds TSB Banking v Peter Twiddy (Inland Revenue Capital Taxes) [DET/47/2004], in which it is stated ‘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.’
These statements lead to the conclusion that the occupant of a ‘farmhouse’ must be a farmer, i.e. the person farming the land on a day to day basis. Whether a person is actually a ‘farmer’ of the land will depend on all the facts of a particular case. Thus a person with overall control of an agricultural business is not necessarily a ‘farmer’ – for example, a commercial agri-business may have overall control and delegate its functions but would not be the ‘farmer’ of the land. Conversely, it is not necessarily the case that a ‘farmer’ of land is a person whose principal occupation consists of farming the land.
The test is therefore essentially a functional one. As the Special Commissioner in Arnander and others (executors of McKenna, deceased) v Revenue and Customs Commissioners [2006] STC (SCD) 800 pointed out, ‘the proper criterion is the purpose of the occupation’ . Since in that case the day-to-day farming was undertaken solely by contractors and a land agent was responsible for the management of the land, the deceased’s residence was not a ‘farmhouse’.
You will therefore need to investigate in detail exactly what the occupier of the residence was doing in the way of agricultural activity in the relevant period prior to the deceased’s death, particularly in instances where the farmer had retired and let their land on grazing agreements, to be able to determine whether their residence could properly be called a ‘farmhouse’ on this basis.
However, a temporary cessation of activity – for example, due to ill health – will not, in itself, prevent a residence being a ‘farmhouse’ if, on the precise circumstances of the case, it can properly be considered as functionally remaining attached to the farm, along the lines described above.
For a house to qualify for agricultural relief as a farmhouse it must in addition satisfy two conditions. It must
• be agricultural property, (IHTM24041) and
• have been occupied (IHTM24111) for the purposes of agriculture (IHTM24101) for the requisite period.
Both tests can be contentious. The ownership (IHTM24121) test may also need to be satisfied."
(ii) Comment
While HMRC note the conclusion in Rosser that ‘the farmhouse must be a dwelling for the farmer from which the farm is managed’, HMRC conclude that the occupant of a farmhouse must be a farmer, that is ‘the person farming the land on a day-to-day basis’. And yet they say also: ‘Conversely, it is not necessarily the case that a ‘farmer’ of land is a person whose principal occupation consists of farming the land’. However, the subsequent reference to the McKenna case might suggest that HMRC will accept that if the landowner as occupant of the farmhouse (instead of the land agent) had been responsible for the management of the land, the residence could have been a farmhouse, even if the day-to-day farming was undertaken solely by contractors. This point needs to be clarified and I have put it to HMRC, in commenting on the draft Manual.
Meanwhile, the proposed replacement content does represent a significant shift from the present guidance, in particular with no express acknowledgement that a farmhouse can be a place from which management operations are conducted.
The ‘character appropriate’ test
(i) HMRC Inheritance Tax’s Eight Considerations
'"he main factors to be applied when determining whether a farmhouse is of a ‘character appropriate’ are considered to be as follows:
(ii) Comment
These eight indicia are not significantly different from the current version, it seems to me.
Grazing licences
(i) The distinction
HMRC have traditionally accepted that land which is licensed to a grazier can form the predicate of the ‘character appropriate’ test for a farmhouse. That is, there is a fundamental distinction between land which is let (in relation to which no relief is due on the house being occupied qua landlord) and land which is licensed (which may give rise to relief for the farmhouse being occupied qua farmer). Indeed, in circumstances where the landowner retains to himself the duty to produce a crop of grass for the grazier’s animals, fence, weed, hedge and ditch etc, with the income received taxable as trading income (and not property income), a strong argument can be presented.
(ii) Northern Ireland worries
However, there has been a worrying BPR case recently, McCall & Keenan as personal representatives of Eileen McClean v HMRC (2008) SpC 687 (see CTR Issue No 23 (Summer 2008) Item 5). There was a finding by the Special Commissioner that the traditional activities reserved by the landowner under a grazing agreement (viz inspection and repairs to fencing, attention to drains, weed control and the finding of the grazier in this case) were all ‘management activities’ directly related to letting the land. Traditionally HMRC have accepted, for example on the basis of the CLA standard form of grazing agreement, that the landowner carries on a trade, with the licence fee treated as trading income, and not as a property business with income taxed as rent (though the income tax analysis is only a pointer, not conclusive). Clearly it is not enough to have the obligations simply set out in the agreement; the landowner must perform them as a matter of fact. The significance of this of course is that, subject to the character appropriate test, it is possible to achieve APR on a house occupied in conjunction with a grazing licence. Might this analysis now be under threat?
(iii) HMRC’s draft amended guidance
The draft amendments to HMRC’s Manual at Section 5 (Occupation) on Grazing Licences is set out below. HMRC still concede that the licence may not constitute a tenancy and so the traditional treatment under (i) above may still apply. However, they warn that grazing lets are now more likely to be a farm business tenancy, under which of course no relief will be due for the farmhouse (as occupied qua landlord).
"Land let on a grazing license [sic]
There is a widespread practice of selling or granting licences/lets to graze animals or take grass from land for a season. Various terms are used to describe it, such as sale of grass, grazing rights, grazing licence/lets or grasskeep.
The term of the licence is always for less than a year so that it does not create a tenancy under the Agricultural Holdings Act 1986 (IHTM24211). Practice varies between different parts of the country. The precise terms of each arrangement also depend on what the parties agree.
Licences are usually sold or granted in the spring. They are for the part of the year during which the land can effectively be used for the purposes of agriculture. (IHTM24041) It is not unusual for the grantor to take responsibility for
Where land is occupied by someone other than the owner under such a licence for less than a year, the owner may still be regarded as occupying (IHTM24111) the land for the purposes of agriculture within the meaning of IHTA84/S117(a). As these licences/lets are for the part of the year during which the land can effectively be used for agricultural proposes, you should not deny relief simply because the occupation is not throughout the 365 days of the year.
However, grazing lets are now more likely to be through a farm business tenancy under the Agricultural Tenancies Act 1995 with the effect described at IHTM24114.
The availability of agricultural relief is a question of fact and degree to be decided upon the particular facts of each case. Recent litigation in relation to claims for business relief as regards the letting of land for grazing (agistment/Conacre in Northern Ireland) may mean that agricultural relief is not available, or is restricted, in such circumstances. Any case where this is an issue should be referred to TG."
Occupation: impact of temporary periods of non-occupation
(i) HMRC’s draft guidance
HMRC’s current stance may be seen from the following paragraph set out in the draft amended Manual under the heading ‘When is property not occupied’, as follows:
‘A person who leaves an agricultural property vacant is not physically in occupation and may not be in occupation for the purposes of agricultural relief, as in the case of Harrold deceased (see below). The period of non-occupation in this case was considerable. It is going to be a question of fact, extent and degree in each case whether the vacating of a property for remedial work, or because of ill health, puts the availability of relief at risk. Thus a necessary absence whilst a building is cleared of rot and re-roofed would normally be disregarded provided that the remedial works are carried out in a business-like manner. Cases where the owner is absent due to ill health can be contentious and difficult to decide. You will need to ascertain the length of, and reasons for, the absence. Any desire on the part of the transferor to return will be relevant but this should be viewed in the light of how realistic such a return might be. Other relevant factors might include the state of the house, its state of readiness for a return, whether the transferor’s possessions were retained ready for a return. The question of how matters such as insurance and community charge were organised might well be relevant. As always it is the function that the house is fulfilling that is paramount and it is possible that even if the transferor is not actually resident there that the evidence will show that the house remained the centre of the farming operations. Any case of difficulty should be referred to TG."
(ii) Comment
So, absence due to illness may not prejudice relief, though it looks as though HMRC may be less compliant than in the past. The agricultural property must be occupied throughout a two year period ending with the date of the transfer, Traditionally HMRC have accepted that relief can be available if the farmer is absent at the date of death through illness in a hospital or nursing home and there is every expectation that he will return (with periods of up to 24 months being known).
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