We are often asked about how Inheritance Tax (IHT) will be charged on farmhouses at Ellacotts. Sometimes the answer is simple, however, often it’s not. This is because, legislation changes, the use of a particular farmhouse changes, and the use of the land the farmhouse serves changes.
When you die, the market value of your assets are calculated, and reliefs can be claimed against certain assets.
What Inheritance Tax reliefs are there for a farmhouse?
- Nil Rate Band (NRB) of £325,000 – which is available to everyone. Plus, any unused NRB transferred from a deceased spouse
- Residence Nil Rate Band (RNRB) – which extends the NRB by an additional £150,000 when an individual’s main residence is passed to their direct descendants on death. The RNRB is reduced by £1 for every £2 by which the deceased’s net estate exceeds £2million, before reliefs. The RNRB is often irrelevant for landowners due to this threshold
- Agricultural Property Relief (APR) – which is given on the agricultural value of agricultural property
Agricultural Property Relief (APR) on farmhouses
One thing to remember about APR is that it’s only available on the agricultural value of the property, which is often lower than market value. Any other agricultural assets, other than the farmhouse, Business Property Relief (BPR) may be available on the excess above agricultural value.
What rate of Agricultural Property Relief can I get?
- APR is at 100% where the transferor has the right to vacant possession, or the right to obtain it within 12 months (or by concession within 24 months)
- In other cases, it is 50%
You may qualify for APR by either occupying land yourself for the purposes of agriculture for two years before the transfer, or by owning land for seven years before the transfer which someone else occupies for the purposes of agriculture.
How does a farmhouse qualify for Agricultural Property Relief?
In order to qualify for APR, cottages, farm buildings and farmhouses must be of a character appropriate to the property. There must be an agricultural unit, with the land dominating and the farmhouse ancillary to the land. If the house is not character appropriate, no full or partial relief will apply.
- Antrobus (2002) identified how to decide whether the farmhouse was character appropriate:
whether the house was appropriate in size, content and layout with the farm buildings and the area of farmland being farmed
- whether the house was proportionate in size and nature to the requirements of the farming activities carried out on the land
- although it might not be possible to describe a farmhouse which satisfied the character appropriate test, you know one when you see it, often referred to as the elephant test
- whether an educated rural layman would view the property as a farm, or as a house with land
- how long the house had been associated with the agricultural property and the history of agricultural production
Can I claim for both Agricultural Property Relief and Business Property Relief?
One recent case saw a successful claim for both BPR on farmland and APR on a farmhouse and surrounding land.
The land was let on a grazing licence and the deceased did not own the livestock. However, he was responsible for their care which included checking them daily and carrying out husbandry tasks. He was also responsible for maintaining the land including fencing, hedging, ditching, harrowing, rolling and topping with his own equipment.
For a successful claim for APR, there must be a functional connection between the occupation of the house and the agricultural activities carried on. It was decided that the deceased ran a farming business and occupied the farmhouse, on a farm, where he was an active farmer and therefore APR was allowed.
The issue relating to BPR was whether the business carried on by the deceased consisted wholly or mainly of making or holding investments. Business requires the activity to be carried on with a view to making a profit or gain. Simply receiving rent or non-commercial hobby farming, does not meet this definition. In this case, the Tribunal held that the asset was a farming business being used in the deceased’s farming activities, albeit with some additional investment income received.
It’s easy for your arrangements to move towards renting. If your land is rented rather than farmed at death, APR will not be due on the agricultural value of the farmhouse, the outbuildings, and potentially on the land, unless the use by the third party qualifies.
HMRC will consider entries on Self Assessment tax returns as well as witness statements when deciding claims.
We can help you to minimise your Inheritance Tax liabilities
This article is only a brief summary of complex and continually developing rules of Inheritance Tax reliefs. Please speak to your usual Ellacotts contact or our agricultural expert Helen King on firstname.lastname@example.org or 01295 250401 who would be delighted to review your specific circumstances and give you advice.
You can also contact us here.
Find out more about our marketing leading farming and aqricultural accounting services.
Read our blog to find out what gifts are classed as exempt from Inheritance Tax.
Read our blog on how to use Pensions to minimise your Inheritance Tax.