Update: agriculture

Inheritance tax

The farming community has been blessed with another inheritance tax case relating to agricultural property relief and the farmhouse.

Through successive cases, the advisers to farmers and landowners and the Revenue have shared the hope that one more case would bring about a situation of certainty so that even if the result was not popular it would at least be clear.

Antrobus 2 (Lloyds TSB Private Banking (Personal Representative of Rosemary Antrobus Dec'd) v CIR DET/47/2004) swung matters in favour of the Revenue. On its facts, it was a case to determine the extent to which a farmhouse that benefited from agricultural property relief actually enjoyed that relief. Antrobus 1 (Lloyds TSB Personal Representatives of Antrobus (Deceased) v Inland Revenue Commissioner [2002] STC (SCD) 468) had determined that the house qualified. In the second case, the question was how far its valuation subject to an assumed covenant against use other than as agriculture limited the value qualifying for agricultural property relief.

The Revenue argued that the covenant specified in s 115(3) of the Inheritance Taxes Act 1984 (IHTA 1984) assuming that the property was subject to a perpetual covenant prohibiting its use otherwise than as agricultural property was equivalent to a covenant in the standard form imposed for planning purposes. Such a condition is that 'occupation of the dwelling shall be limited to a person solely or mainly working or last working in the locality in agriculture or in forestry or a widow or widower of such a person and any resident dependents'.

It was the taxpayer's argument that gave the Revenue the chance of widening the whole discussion. On behalf of the taxpayer, it was argued that a lifestyle purchaser (as opposed to a conventional farmer) could acquire a house with a covenant limiting it to agricultural use only and farm it through contract farming, share farming or partnership farming even if he had no farming knowledge or had a full-time job. If that analysis was right, there was no real limit to the class of persons who could buy it and therefore little or no effect on the market value. That argument led the Revenue to counter by arguing that in such circumstances the house would not be a farmhouse at all because the occupier would not be a farmer. The farmer, according to the Revenue, was the person driving the tractor, getting his hands dirty and running the business on a day-to-day basis. Although that argument was not necessary for the Revenue's ultimate success in the case, it appeared to find favour with the tribunal.

Antrobus revisited

The whole subject of what is necessary for a house to qualify as a farmhouse for tax purposes was raised in rnander Lloyd and Villiers (Executors of David and Lady Cecilia McKenna) v Commissioners for HMRC [2006] SPC 565.

The Rosteague Estate comprised 188 acres with 52 acres of foreshore 10 acres of woodland and 110 acres of farmland and six acres of house and garden including Rosteague House. Rosteague House was a Elizabethan Manor House with seven bedrooms and some 8,000 sq ft of accommodation.

A separate farmhouse had been built in the early 1900s from which point the main house was separated from the farming.

The McKenna family bought the Estate in 1945 and when the existing Agricultural Holdings Act tenancies expired in 1984, Mr McKenna and his wife took on the farming and sold off the farmhouse. They were then 73 and 74 and farmed through a contractor. Mr McKenna maintained accounts for the business and the rating authorities accepted the building as a farmhouse.

There were various contract farming agreements that gave the contactor very wide-ranging control over the farming management. The contractor was also to act for the agent for the purchase of stock seeds and fertilisers. In more recent times the contactors claimed the arable area payments and made the IACS returns. The McKennas delegated sole responsibility for machinery and decisions of farming policy and day-to-day management and they took fixed drawings from the arrangement. It could have been described as a rent equivalent.

In practice, because of the age of Mr and Mrs McKenna, their agent handled all of the details and meetings. Mr McKenna became infirm and Mrs McKenna unwell. From 1995, the agent took on the decisions relating to agricultural matters.

The first question to be decided was whether Rosteague was a farmhouse. The judgment reviewed all of the traditional cases determining what a farm house might be but in particular moving on to the more recent decisions. In Rosser v IRC [2003] STC 311, the farmhouse was described as a dwelling for the farmer from which the farm is managed.

In Antrobus 2, the emphasis was more on the requirement for the farmhouse to be occupied by the person who farms on a day-to-day basis rather than by the person in control of the agricultural business.

From the provision of the new farmhouse in 1908 until 1984 then quite clearly Rosteague House was not the farmhouse. The question was what, if anything, had changed when Mr and Mrs McKenna brought the farming in hand.

The Special Commissioners thought that, effectively, not very much had changed in this respect. 'If the farmer of the land is the person who farms it on a day-to-day basis rather than the person who is in over all control of the agricultural business conducted on the land then Mr McKenna was not the farmer. The purpose of the occupation at Rosteague House was not to undertake the day to day farming activities.'

As a result, the house was not a farmhouse and indeed was not occupied for the purposes of agriculture throughout the period of two years ending with the date of the death of the survivor of Mr McKenna and Lady Cecilia.

In any event, the tribunal found that the size of the farmhouse was entirely disproportionate to the land being farmed and that an educated rural layman would view it as a country house with land rather than a farmhouse. In other words even if Rosteague House had been decided to be a farmhouse, it would not be of a character appropriate to the agricultural land occupied with it and so would never have qualified for agricultural property relief.

Effect on farming contracts

Under all the circumstances, the result was not perhaps surprising. The difficult aspect is to evaluate exactly how this affects the thousands of contract farming arrangements which are standard throughout the country.

One preliminary point is that there is a conflict between the thinking in McKenna and in Antrobus 2. In Antrobus 2, it was suggested that where somebody who had in the fullest sense been a farmer carried on living in the farmhouse in old age then that property might still qualify as a farmhouse. McKenna appeared to apply a much harder line to that aspect. If a farmer becomes incapacitated for the last two years of his life then, under McKenna, the Revenue would appear to be ready to argue that the house was no longer agricultural property because it was not used for that purpose. It remains to be seen whether this is a point that will be taken and pursued on a general basis or whether it is limited to the facts of the case.

The most significant practical outcome of the case is the impact that it may have on the many arrangements whereby farms have been farmed pursuant to contracting agreements with the aim of ensuring that the house qualifies for agricultural property relief.

The history of the whittling down of agricultural property relief for farmhouses suggests that the Revenue may seek to proceed on the basis that McKenna will effectively exclude the vast majority of contract farming agreements from agricultural property relief for the farmhouse. It is wrong for such a generalised view to be conceded and a number of aspects of McKenna have to be born in mind.

• The contract farming agreement devolved enormous managerial control to the contractor.
• The arrangements with the contractor were all indirect.
• The arrangements were seen as replacement for the previous tenancies.
• It was the contractor who was the farmer making the claims for the subsidy in his own name.
• The owner received a fixed remuneration, which is always fairly dangerous.

Unless the Revenue is successful in taking the law further so that the test is who drives the tractor, it ought to be possible to structure a contract farming agreement to give the farmhouse a fair run at qualifying for agricultural property relief. There may be a commercial price to pay. The highest returns from contracting agreements have been obtained when an expert contractor bids for the contract knowing that he will effectively have unfettered control.

Regulatory Reforms: stones left unturned

William Batstone in his recent article ('Free range', (2006) 150 SJ 1489, 17.11.06 ) outlined the reforms made by the Regulatory Reform (Agricultural) Tenancies (England and Wales) Order 2006 to the structure of Agricultural Holdings Act tenancies and farm business tenancies. One of the questions raised by Antrobus 2 and McKenna is whether it is now preferable to farm through a farm business tenancy in view of the new relaxations and considering that contract farming may no longer deliver the agricultural property relief that was once assumed.

Clearly every case will turn on its own facts and the particular needs of the landowner. Nevertheless the reforms to tenancy law made in 2006 do not address a number of the issues that most concern landowners deciding which format to follow.

It may be shutting the stable door after the horse has bolted, but an inevitable consequence of letting land as opposed to farming it in hand is the loss of control over the subsidy regime. It is instructive to compare the position of a farmer farming in hand (including under contracting agreements) since 2000 with that of a farmer who had let his land in that period.

The in-hand farmer is the undisputed owner of all of his own subsidy rights including the single farm payment entitlement. The landowner who has let his land will find that the entitlements belong to the tenant and the only claim the landowner will have will depend on whether generic wording in his tenancy agreement is adequate to catch a subsidy regime whose details were not even remotely contemplated at the time the tenancy started.

When the Tenancy Reform Industry Group (TRIG) started the work that ultimately led to the 2006 Order, it was hoped that there would be changes in the tax system to mirror the changes made to the tenancy regime. These changes remain conspicuous by their absence. It is worthwhile rehearsing some of the disadvantages that apply to tenanted agricultural land.

The ownership qualification for agricultural property relief on tenanted land is seven years as opposed to two years for owner-occupied land '“ s 117, IHTA 1984.

If an owner-occupier diversifies and uses part of his agricultural land for business purposes, it will qualify for business property relief. If, however, a tenant of agricultural land diversifies into a non-agricultural use, the owner of that land qualifies for no relief whatsoever for inheritance tax purposes. Diversified land necessarily does not qualify for agricultural property relief as it is not agricultural property. Business property relief does not apply to let land. While this is not a problem for institutional land owners, it is a very major difficulty facing individual landowners even if favourably disposed to the TRIG reforms. Landlords will be reluctant to embrace their tenants' extra freedom to diversify if that will simply mean a substantial inheritance tax bill for their heirs.

Capital gains tax

Capital gains tax rollover relief applies to owner occupied land but not to let land.

If a farmer continues to live in his farm house but lets the farm land surrounding it then there will be no prospect whatsoever of the farm house attracting agricultural property relief (see Starke v LRC [1994] l WLR 888). If, however, the farmer continues to farm in hand then, subject to passing all of the various hurdles, there is the prospect of agricultural property relief at 100 per cent on the farmhouse. Following Antrobus 2 and McKenna it may certainly be more difficult to obtain agricultural property relief for a farmhouse where the owner wishes to remain in occupation, but in the tenanted system there is no chance whatsoever.

While the 2006 Regulations undoubtedly are helpful and clear up some of the issues which were restricting the letting of agricultural land, there are other reasons as mentioned above which mean that in many cases the advantage still lies very heavily in farming in hand whether alone or in partnership or through contracting or share farming.