The availability of agricultural property relief from inheritance tax is an important factor in considering farming businesses and investment in agricultural property, whether from within or outside the industry.

While there are plenty of ways of preserving 100% agricultural property relief on farmland, even if one is no longer actively farming the land on a day-to-day basis, the position relating to the farmhouse is more complex.

The now infamous Antrobus case has provided a 5-pronged approach to consider when applying for agricultural property relief:

1. Is the farmhouse character appropriate with reference to the size, content and layout of the farm? An aerial photograph may help the estate’s case (or the Revenue’s!). In the case of Dixon v IRC the farmhouse was surrounded by 0.6 acres of land and it was held that the scale was more appropriate to a garden rather than agricultural property. This may seem clear to most but there will be some cases which test where the line should be drawn. 
2. Is the farmhouse proportionate in size and nature in relation to the farming activities? A comparison with other local farms may be useful. 
3. The “elephant test”. You know a farmhouse when you see one! 
4. Consider what an educated rural layman would think. 
5. Look at the historical association with agricultural property. Is there a history of agricultural production which has been carried out from the property?

If the farmhouse does not pass these tests then it will fail to qualify for the relief and inheritance tax will be payable at 40% on the open market value of the property over and above the tax free allowance.

Another point to consider is that it is not always the case that those residing in the farmhouse carry on the day-to-day farming business. Those who use contract farmers should be particularly careful following the case of McKenna. In this case the farming was carried out by a contract farmer and the management of the contractor was carried out by an agent. Agricultural Property Relief was refused.

If a contract farmer is used, those residing in the farmhouse should take particular steps to ensure that they do not use agents to manage the contract. They must take an active role in this themselves. Further, they should also ensure that the farm itself is run from the farmhouse. Papers should be kept there and any meetings should ideally take place in the farmhouse itself. Essentially, it is crucial to be able to show the Revenue that the farmhouse is the hub of the farm itself.

If the executors successfully claim that the farmhouse is indeed a true farmhouse then the valuer must be asked to value both the agricultural value and the open market value of the property. The agricultural value will be calculated assuming that the house is subject to a restriction that it may only ever be used for agricultural purposes and therefore will naturally be lower than the open market value. As a rough guide the Revenue tends to take an initial approach that the agricultural value (on which you can gain relief) is approximately 70% of the open market value. Therefore inheritance tax of 40% will be due on the remaining 30%.

Whilst it is not all doom and gloom for the farming industry, it is necessary to keep an eye on the Revenue’s movements and ensure that up to date advice is taken to ensure that tax is minimised and the farming business itself remains secure after the death of a family member. For more information contact vicky.raynes@birkettlong.co.uk