Common sense

As the summer sun baked the countryside, the Upper Tribunal delivered its long-awaited decision on inheritance tax (IHT) on farmhouses where the farmland and farmhouse are not in common ownership (HMRC v Hanson).

It confirmed that for a farmhouse to be of a "character appropriate" to the associated farmland for the purposes of obtaining agricultural property relief (APR) from IHT, common occupation of the farmhouse and farmland is a sufficient connection. (The tribunal here was not concerned with the "elephant test" or other tests indicating whether or not the farmhouse was of a character appropriate as discussed in Antrobus I.)

A number of cases in recent years have considered the definition of "farmhouse" and what it means to be of a "character appropriate" under section 115(2) of the Inheritance Tax Act 1984. In Rosser v IRC [2003] STC 311, it commented in more detail on the relationship or "nexus" between the farmhouses themselves and the "land occupied with them" under the third limb of section 115(2). In Rosser, it was held that there had to be a "nexus" between the farmhouse and the farmland and that it "was clear that that nexus must be derived from common ownership rather than from common occupation".

In Hanson, the question was: do you measure the character of the farmhouse against agricultural property in the same ownership as the farmhouse or in the same occupation? In that case, the farmhouse and about 25 acres of farmland were owned by Mr Hanson (the deceased) for IHT purposes, but the house was occupied by his son, who farmed the land together with 128 acres of his own land.

It was agreed that, for the farmhouse to qualify for APR, the 128 acres of farmland owned by the son needed to be taken into account. HMRC argued that the 128 acres should be disregarded because they were not in the same ownership as the farmhouse. The Upper Tribunal disagreed and confirmed that the son's common occupation of the farmhouse and the 128 acres of farmland was sufficient nexus for the farmhouse to qualify as agricultural property in the deceased's estate.

The decision provides a useful insight into the interpretation of the legislation and represents a step away from previous decisions such as Rosser, which looked towards common ownership. The decision itself contains practical examples of how the legislation applies, which are a helpful reference for considering APR on farmhouses where the ownership structure is not straightforward, as is often the case. In short, there should be common occupation to give a "functional connection" between the farmhouse and the farmland.

The judgment even suggests that if common ownership is rejected as the requisite form of "nexus", it is at least arguable that there could even be certain situations where there is a sufficient nexus even without common occupation, the example cited being where a farmer owns and occupies the farmhouse that serves the farmland that is owned and occupied by a family company of which the farmer is a minority shareholder and managing director. Clearly, such an argument would be extremely fact dependent and open to challenge by HMRC.

Moreover, the Upper Tribunal warned that each case must be decided on its own facts and there may be situations (although rare) where common occupation does not provide a sufficient connection. This reinforces the importance of carefully structuring the ownership and occupation of agricultural property and any changes to those arrangements.

Fiona Graham (pictured) is a partner and William Hadley is a solicitor in the private client and tax team at Boodle Hatfield

They writes a regular blog on landed estates for Private Client Adviser