‘A tax’ on our farms

  • Author : Clive Beer
  • Date : May 2010
ABOUT THE AUTHOR: Clive Beer is a Director of Savills, based in the Telford office

I  have been a land agent for nearly 20 years and I have come to appreciate the old adage: ‘there are only two certainties in life namely death and taxation.’ It is perhaps not surprising therefore that the most professionally challenging matter I continue to encounter is taxation following death.

The theatre of planning for inheritance tax and litigation has changed considerably, largely due to changing attitudes at HMRC and the valuation office, the development of case law and changes in the property market for rural assets. No doubt the greater focus from HMRC and the valuation office has mainly been fuelled by greater expectations of tax revenue.

It remains clear that the challenges of tax planning remain a moving goal, and therefore an assessment of where we are today might be helpful.

In terms of Agricultural Property Relief (APR), the current areas of concern in relation to farmhouses can be best summarised by the following:

  • What is a farmhouse?
  • Is it character appropriate?
  • Confusion and muddled thinking by HMRC and practitioners with 1 and 2, when considering the occupation test.
  • What is the agricultural value of the farmhouse as compared to its market value, and has there been an approach by the valuation office/HMRC to use Antrobus II in a formulaic way, as opposed to dealing with each case on its own facts and merits?

In terms of ‘what is a farmhouse’, there is now much definition following the Antrobus and McKenna cases. However, in terms of qualifying activities, one concern that I have is the almost knee jerk reaction against the use of contract farming or share farming, as being an appropriate qualifying activity for agricultural purposes. It seems reasonable to me, that a bona fide contract farming or share farming agreement, will undoubtedly be a qualifying agricultural activity. The importance lies in ensuring that such arrangements are genuine, i.e. not sham arrangements that can be backed up with very good evidence.

It remains clear that the challenges of tax planning remain a moving goal

This evidence should include joint venture agreements, adequate supporting accounts, appropriate exposure to risk and, vitally, a record of the business activity that has occurred over a number of years. In such situations the evidence itself will speak to the qualifying activity, but what is vital, is the need for this evidence.

Another worrying development relates to the age and health of the farmer. What is the situation if the farmer, who has been in occupation of a farmhouse all his life, in his later years needs to go into care and no longer lives in the farmhouse? The potential to lose APR for the farmhouse is a real concern and in the future it may be appropriate for such care to be given in the farmhouse, in order to mitigate the chances of losing a future claim for APR.

Turning to character appropriateness, one important question is: are the five Antrobus tests still valid? Arguably, McKenna brought in viability and size of the holding as matters to possibly be considered within the mix and therefore, these could be considered as two additional tests that need to be brought in, in terms of an overall assessment. Whilst I can understand the logic in the size of holding test, surely what matters is the activity that has happened and the intensity of that activity. A common sense approach should be applied as to whether or not the size of holding compared to the farmhouse, makes for a character appropriate property, bearing in mind what the factual activity was. As we all know; agricultural incomes fluctuate over any given period. Some years a farm may be trading in profit and others it may not be, but how can character appropriateness, which is intended to be a reasonable assessment of the physical factors, be character appropriate one year when a business is trading profitably, but not in another year?

I think again a common sense approach needs to be applied here and if viability is indeed a test, it needs to be applied over a number of years of trading activity. This would reasonably counteract any sort of argument for character appropriateness moving in and out on a yearly basis, depending upon annual trading conditions.

My fear is that HMRC and the valuation office try to create formulas by which they will assess issues including character appropriateness and agricultural value. Such an approach has to be wrong as this seems to be inconsistent with all of the case law which I have been involved in, where cases were decided upon the individual facts that occurred in each situation.

Over the last few years, following my involvement in Antrobus II, there certainly seemed to be a trend whereby the district valuers office was looking to create a formulaic approach to agree the discount from market value to agricultural value at 30 per cent. It is quite clear that a number of settlements were achieved where executors took a commercial decision to accept the 30 per cent as an alternative to litigating the points to the Lands Tribunal. Clearly such settlements do not, and cannot, represent evidence that 30 per cent is the answer, they merely reflect the commercial attitude of executors who are dealing with litigation risk.

If this article stopped here it might look somewhat gloomy, but a much more positive note has been the use of Business Property Relief (BPR) in recent inheritance tax claims. Indeed case law suggests that the courts are sympathetic when claims for business property relief are being made.

BPR is available on 100 per cent of the value of a property, which consists of a business, or an interest in a business, or at 50 per cent of the value of land or buildings occupied by a partnership, of which the transferor is a member of the company which he controls; also a 100 per cent value of a share holding in a unquoted (trading) company.

Recent court cases such as Hall, Pearsey, Farmer and Balfour, have tended to show that the courts are very sympathetic to a claim for BPR and this sympathy now seems to extend to HMRC.

In terms of what HMRC will look for when assessing a claim for BPR, the following criteria apply:

  • Do assets form part of a business operation?
  • They need to be assets of a business – they need to be shown on the balance sheet.
  • There needs to be one operational account, of which these business assets form a part.
  • There needs to be business activity, as opposed to mere investment activity.
  • Evidence – as always, any claim for any sort of relief needs to be backed up by clear and transparent evidence.

The Farmer case is a good illustration of how a claim for BPR might work. The fundamental hurdle in applying the Farmer case is that BPR does not apply to a business that is mainly held as an investment. It might therefore be helpful to analyse any sort of business and benchmark it against the Farmer case (see boxout).

The Farmer case

By way of summary, in the Farmer case the Special Commissioner was considering a farm of 449 acres (274 acres of arable, 60 acres of grass and 90 acres of woodland/miscellaneous). The farm was managed by two full time workers, casual labour and the input from a son, together with advice from external consultants.

There were 23 lettings on the farm as follows:

  • six former farm cottages let on assured shortholds,
  • four former farm buildings let as commercial lettings,
  • four former farm buildings let for storage,
  • three mobile homes,
  • two bungalows,
  • two stable blocks, one of which was let with a small paddock for grazing and a bungalow,
  • one cottage occupied by a retired farm worker, and
  • one timber storage site.

The essential ‘acid test’ that the Special Commissioner had to consider, was whether the entire business was an investment business. She applied five factors in order to judge this, namely:

1The overall business context was considered, dealing with the factual matrix of the historical business and its particular features.2The turnover in the lettings business. This showed that in the years 1989 – 1996, the following percentages of turnover of the business related to the lettings activities: 34 per cent, 45 per cent, 35 per cent, 52 per cent, 46 per cent , 36 per cent, 33 per cent, 53 per cent3The profit of the business was examined in the same eight years and the following percentages related to the lettings:
  • gross profit: 61 per cent, 71 per cent, 59 per cent, 89 per cent, 72 per cent, 48 per cent, 44 per cent, 90 per cent
  • net profit: 100 per cent, 100 per cent, 75 per cent, 100 per cent, 87 per cent, 54 per cent, 50 per cent, 100 per cent
4The probate value of the property in the business was considered and it was found that GBP2,250,000 was the value of the trading property and GBP1,250.000.00 was the value of all the lettings.5The time spent on the lettings business by various employees was considered and it was found that the farm manager spent 10 per cent of his time on the lettings, the assistant manager 5 per cent and the son 70 per cent.

On the basis of the above factual matrix, the Special Commissioner found that the land was used for the trading of let assets and it qualified for 100 per cent BPR.

Independent evidence?

An exceptionally important point to consider, is perhaps not a tax point as such, but more a judicial point and relates to the way in which matters of evidence appear before the court.

As a chartered surveyor I am bound to provide independent evidence by the Civil Procedure Rules and the RICS Practice Statement. As such, if I have, or indeed my company has, material links to a taxpayer in a case in which we are acting, then we have to strongly consider whether or not we can give independent evidence. For example, if we had been managing an estate for a client for the past 20 years, and a tax issue needed to be dealt with by the Lands Tribunal, I could not see myself as being able to give independent evidence in such a reference.

Interestingly, this question must be posed to those providing evidence on behalf of HMRC, which is often the valuation office. The valuation office is an agency of HRMC and therefore as a matter of common sense, it seems to me to be impossible that a district valuers office could act independently from HMRC when giving expert evidence in a taxation case. It must be a surprise that this is exactly the practice that has been going on for decades, but how can such a policy be right in an age of transparency and appropriate professional ethics?

In the future I expect this practice to be scrutinised by the courts, as no doubt it will be raised in legal submission and the courts will need to weigh evidence accordingly in order to avoid bad judgments being made.


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