When is a Farmhouse not a Farmhouse?

Ref. Arnander (Executors of McKenna, deceased) -v- Revenue & Customs Commissioners [2007] RVR 208

A long string of cases over the last ten or so years has helped to clearly define the legal stance that Revenue & Customs Commissioners will take with regards to Inheritance Tax (IHT) and Agricultural Property. The upshot of these cases, and perhaps most importantly the McKenna case referenced above, is that farmers should be clear about how their property will be classified when it comes to inheritance taxation.  The result could be up to 100% relief.

In the case referenced above, now known as the ‘McKenna case’, the assertion that the building in question was a farmhouse was rejected on the grounds that:

“Rosteague House was not the main dwelling from which the agricultural operations over the land were conducted and managed.”

The commissioner in this instance, influenced in part also by the decisions of the Antrobus cases that came before, concluded that, in essence, a farmhouse is a dwelling for the farmer from which the farm is managed. The farmer of the land is the person who farms it on a day-to-day basis rather than the person who is in overall control of the agricultural business conducted on the land.

She also re-established the principle that, for any property, “the status of the occupier is not the test, but the proper criterion is the purpose of the occupation of the premises”. If the premises were extravagantly large for that purpose the house might not qualify. The case of McKenna showed that influence, as the property in question was a faded, but nonetheless imposing, 7 bedroom, Grade II* listed manor house.

The Commissioner decided that with regards to Mr McKenna, he was not the farmer because, inter alia, the farming had been contracted out so that day-to-day farming activity was carried out by the contractor through an agent, and not by the owner.

Additional considerations included the limited use of the house for farming matters, the acreage farmed, the size of the property, the interior design, the use of outbuildings and even the health of the owners prior to death. Proof was needed to show the buildings were actively used for farming.

For our readers, this means that in many cases tax relief is available on agricultural property, but it must be made as clear as possible to the authorities that the property truly is a farmhouse. Marketing the property as a grand residence, as was the case in both Antrobus and McKenna, will not assist with maintaining the image of a farmhouse.

Factually maximising the farming activities of the property can assist with clearing this issue up in more complex cases, for example with contract farming, grass letting or share farming. Examples of useful activities in the case of grass letting might include:

–          Keeping a sheep dog and checking stock regularly

–          Owning and regularly using farm equipment

–          Attending relevant business meetings and conducting business phone calls

–          Complete SFP/DEFRA payments

It goes without saying that keeping a clear record of all of these matters will assist with building a clear body of unambiguous proof.

Further information should be available from your accountant. The result of carefully managing your agricultural property could mean a 100% relief on Inheritance Tax, which is currently charged at 40% of all value above £325,000, for at least part of your property’s value and could thus save hundreds of thousands of pounds.

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