Executors of deceased farmers will generally claim reliefs that should apply to the farm property, such that it is fully exempt from inheritance tax. However, HMRC may challenge such claims where a valuable farmhouse is involved.
In W Charnley & M Hodgkinson (Executors of T Gill Deceased) v HMRC [TC07425] the executors successfully defeated HMRC’s challenge to the availability of relief.
Farmer Gill occupied Woodlands Farm for many years until his death in 2013.
The farm property on which agricultural property relief (APR) or business property relief (BPR) was claimed comprised a farmhouse, yard, brick barn, a vegetable plot, 21.19 acres of permanent pasture predominantly let on grazing licence and a range of buildings used for storage of commercial grass cutting equipment. There was also a let residential property on which BPR was not claimed.
Gill ceased to maintain his own livestock a number of years before his death but took responsibility for rotating livestock occupying his land under licence and for checking the welfare of the animals on at least a daily basis, reporting any problems to the owners. He also assisted with vaccinations and helped care for any sick animals. Gill attended to the hedges, fencing, ditches, drains, weed and pest control, topping, farrowing and rolling.
HMRC allowed the claim for APR in relation to the land let on grazing licence.
However, HMRC argued that Gill did not occupy the farmhouse for agricultural purposes (IHTA 1984 s 117) in the two years prior to his death and consequently APR was not due. It also refused APR in respect of the yard, brick barn and other outbuildings, on the same basis.
The claim for BPR on various items of farm machinery was refused on the grounds that Gill was carrying on a business of making or holding investments (IHTA 1984 s 105).
HMRC’s interpretation of “agricultural purposes” was based on the decision in Atkinson v HMRC  UKUT 506 (TCC), where it was held that “there must be some connection between the residential use of the cottage and an agricultural purpose sufficient to make the occupation for the purposes of agriculture.”
HMRC asserted that Gill did not carry on agricultural or farming activities. He undertook general maintenance of his land but those actions “were simply the actions of a prudent and conscientious landowner keeping his land in good condition in order to generate an income from that asset.”
Whilst not disputing that Gill had kept an eye on livestock on his land, HMRC noted he was under no obligation to do so under the terms of the grazing licenses and was not paid for it.
In the absence of a functional connection between the house and the operation of a farm (following Hanson v HMRC  UKUT 224 (TC)), the farmhouse and outbuildings were not eligible for APR, and Gill merely occupied the house as a residence.
HMRC took the view that although the farming equipment was used by Gill in carrying on the maintenance of the land, those activities were not “agricultural”.
The executors argued that Gill’s activities – monitoring livestock, keeping the land in good condition by maintaining hedges, drains, ditches and harrowing, rolling and topping the land – were all agricultural in nature. Whilst Gill may not have been under a contractual obligation to move cattle or observe the livestock on his land every day (and sometimes more frequently), the fact that he did so rather than live off the income, supported the fact that he was, and always had been, a farmer. It was, therefore, erroneous to deny APR on the farmhouse and buildings.
Business property relief
HMRC considered that Gill was not entitled to BPR as his business was that of making or holding investments, ie he derived income from grazing licences and letting the land rather than actively farming it. HMRC cited the letting of the residential property in support of this view.
The executors argued that the approach adopted in HMRC v Vigne  UKUT 357 (TC) should be applied ie whether the business was “mainly one of holding investments”. Gill farmed his land using plant and machinery, and no properly informed observer would say that the business was one of wholly or mainly of holding investments. BPR should therefore be available.
The FTT considered the scope of the phrase “for the purposes of agriculture” as wide, and that a restrictive approach should not be taken. This was supported by Atkinson where the judge stated that no “…special meaning [is] given to the words ‘for the purpose of agriculture’”.
Whilst there had been a change in the way Gill carried on his business when he ceased owning livestock, “to all intents and purposes Gill’s activities … had always been, and remained, that of farming.”
Gill did not merely provide land for grazing; he carried out substantial work to successfully let the land and it would be over-simplistic to describe these activities as maintenance. The requisite nexus between Gill’s occupation of the farmhouse and his farming activities was present and APR was due on the farmhouse and various outbuildings.
The claim for BPR was also allowed. The fact that income was derived from the land did not exclude it from relief, and a distinction should be drawn between holding an investment and the running of a business such as farming from the land. The work carried out by Gill was not incidental or maintenance, and therefore BPR was due.
HMRC resisted the wide interpretation of “for the purposes of agriculture” on the grounds that this would be a significant extension of the scope of APR, as it would in future enable landowners who carry on very limited activities in relation to land to claim APR.
However, the FTT was clear that the nature and scope of activities carried on by Gill went above and beyond turning land to account for profit. The fact that Gill directed his activities to someone else’s cattle rather than his own, and was not contractually obliged to undertake some aspects of those activities, was not relevant. The extent of services provided by Gill meant that the business rather than investment activity predominated.
In my view, the bar continues to be set high and HMRC’s concern that APR will be available where “very limited” activities are carried on is misplaced.