USA Agricultural property relief and planning for pitfalls
As the farming landscape continues to change, it is important to understand what factors may impact any potential IHT relief. This article considers some of the pitfalls, including the impact a share farming agreement or a contracting agreement may have on the availability and rate of the relief.
Agricultural property relief (APR) is very valuable to farmers and landowners. It is the only relief that can provide IHT relief for owner occupied houses as well as relief for landowners who are letting their property.
Unsurprisingly, APR is available on 'agricultural property'. This is property, agricultural land, buildings used for agriculture and cottages and farmhouses occupied for the purposes of agriculture. The relief is limited to the agricultural value of the land, which is the value of the land as though subject to a perpetual covenant prohibiting its use other than for agriculture. Any value in excess of that will not qualify. Following the ruling of the Valuations Tribunal in Antrobus, district valuers frequently suggest that, for farmhouses, the difference between open market value and agricultural value is 30%. This is a rule of thumb figure and each case has to be considered on its own merits.
APR is available at two rates: 100% where vacant possession can be obtained within 12 months and 50% in other cases. Generally, the 50% rate applies to cases where there is a tenancy granted before 1 September 1995. New tenancies granted after that date will qualify for 100% relief.
Before accepting a claim for APR, HMRC will want to see evidence that the farm, including the buildings, is genuinely being occupied for the purposes of husbandry. The legislation includes land used in habitat schemes as being within the definition of agriculture, as well as land which is likely to be brought back into production. It does not include grazing land for adult horses.
Potential pitfalls
Partnerships
Care has to be taken in cases where land is owned by a partner and used by a partnership. Some partnership deeds state that on the death of a partner, the partnership cannot be wound up, and vacant possession cannot be obtained for, say, 30 months. There is a danger that HMRC will take the view that relief will only be available at 50% as vacant possession cannot be obtained within 12 months of the date of death. It is worth noting that if an unchallenged notice to quit has been given by the date of death the period will be extended to 24 months.
Contracting agreements
Generally contracting agreements attempt to ensure that the landowner is the only party in occupation, with no occupation rights given to the contractor. If the contract if not correctly worded however it is possible that it may inadvertently give both parties to the contracting agreement a right of occupation. This may mean it is not possible to show evidence of the ability for vacant possession within 12 months of a chargeable IHT event, for example a charge on a death estate, a ten year charge in a trust or a chargeable lifetime transfer. The IHT relief may then be limited to 50%.
Share farming agreements
With share farming agreements, all parties to the share farming agreement are viewed as in occupation of the land. It is therefore important that the agreement allows for the landowner to be able to obtain vacant possession within 12 months in order to be eligible to claim 100% APR. This can cause difficulties as agreements are often structured to give landowners and sharefarmers the opportunity to form long term relationships.
Tenancies
To qualify for APR the property must have been owned and occupied for the purposes of agriculture for two years if the owner is the farmer or for seven years if the property is let to someone else.
Where the property is let to someone else, care must be taken to ensure that the tenant occupies the property for the purposes of agriculture. Leases often contain conditions stating that farm cottages or houses must be occupied by agricultural workers. The landlord will not want to find that he loses his APR because his tenant is now using the property for do-it-yourself horse liveries.
Valuation
For a landowner with let land near a town, the restriction of relief to agricultural value can be a real problem. Even in times of recession land with hope value is worth considerably more than agricultural value.
Interaction with Business Property Relief
Where the famer is trading, business property relief (BPR) may be available. However, BPR will not be available on the farmhouse. BPR also cannot be used to obtain relief on the agricultural value that remains chargeable to IHT if only 50% APR is available. For example, if a parcel of land has an agricultural value of £100,000 and hope value of £25,000 and is eligible for 50% APR and 100% BPR, IHT relief would be available at 50% on the £100,000, and BPR would be available on the £25,000. This would leave £50,000 chargeable to IHT.
Farmhouses
Houses occupied for the purposes of agriculture can qualify for APR provided they satisfy various tests. The tests are that the house must be occupied for the purposes of agriculture, and it must be of a character appropriate to the farm.
Character appropriate:
The house should be the farmhouse for the farm rather than a large house with land. For example, it would be difficult to argue that a large house with 150 acres would be eligible for APR. This is particularly in point if the land is occupied by horses and 50 rare breed sheep.
Historical associations are also important, so if there is evidence that the farmhouse has been the house for that farm for the last 100 years, the evidence that it is the farmhouse is stronger than where a grand new house has been built more recently.
Occupied for the purposes of agriculture:
It is not always clear whether or not the farmer owning the farmhouse and land occupies it for the purposes of agriculture, and the existence of a share or contract farming agreement may impact the relief available on the farmhouse. This is a question of fact and degree to be decided on a case by case basis and may involve consideration of aspects such as:
- the degree of financial risk
- involvement in the day to day agricultural activity including the regularity and scope of any meetings with the share / contract farmer
- involvement in decisions relating to the selection of crops, sowing, harvesting, sales, and so on.
In the case of Arnander, the farmhouse was occupied by an elderly couple but the farming operations were carried out through a contracting arrangement. It was decided that the day-to-day management and all acts of husbandry over the land were in that instance solely the responsibility of the contractors. The couple also retained the services of a land agent who was responsible for the management of the land, the farming activities and all discussions with the contractors.
It was found that the landowners were not occupying the farmhouse for the purpose of agriculture.
Key points to take away:
APR is a generous relief but the rules are complex and we can help advise you on your tax position. This is particularly important where you are a party to a share farming or contracting agreement, and taking advice can help to ensure that there is no detrimental effect on the APR status of the land or the farmhouse.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication.
Tax legislation
Tax legislation is that prevailing at the time, is subject to change without notice and depends on individual circumstances. You should always seek appropriate tax advice before making decisions. HMRC Tax Year 2023/24.
Approval code: NTEH7092355
