There is some good news for the agricultural community in the form of a recent court ruling which may reduce the exposure of many farmers to Inheritance Tax (IHT) in clarifying the scope of Agricultural Property Relief (APR).
The Hanson case involved HMRC seeking to charge IHT on a farmhouse owned by a deceased farmer where the farmland and farmhouse were not in common ownership.
In line with a previous ruling by the First Tier Tribunal, the Upper Tax Tribunal disagreed with HMRCs standpoint, declaring that APR for IHT can be secured on the basis of common occupation, despite a lack of common ownership.
In the Hanson case, the bulk of the land was owned by the son of the deceased. The son lived in the farmhouse which was owned by the deceased. The deceaseds executors successfully established that the house was occupied for agricultural purposes and was "character appropriate and APR was secured notwithstanding that the deceased had ownership of a very small acreage. The Tribunal agreed that it was necessary to analyse what was going on "on the ground to establish the reality of the farming unit. That analysis involves considering the issue of occupation not ownership.
Had the judgement gone in favour of HMRC, there was potentially loss of extremely valuable APR on the farmhouse.
So, for example, a tenant farmer who had bought a plot adjoining the tenanted land on which he has built a farmhouse, might not have secured APR on the house had HMRC not lost the case. Likewise, a family whose land had been passed to a younger generation but where, for example, the occupation of the farmhouse remained with the parents, might not have secured APR on the house.
The result of this court ruling is undoubtedly good news but even so, careful planning with professional advice is vital. Also bear in mind that APR is only applicable to agricultural value which does not always equate to full market value.
If land has development potential, "agricultural and "market values need to be carefully considered. Also, there has to be use for the purposes of agriculture so occupation of a house by a family member not involved in the farming enterprise means no APR.
Reduced APR increases IHT liability.