Have any of your clients ever owned assets during their lifetime that meet the Agricultural Relief (AR) requirements?
This guide explains how to identify and manage agricultural assets, so you can ensure your clients maximise and secure AR.
When receiving instructions and advising on planning, you must understand the nature of your clients’ agricultural activities. This knowledge will help you satisfy HMRC’s requirements when applying for AR. Furthermore, you should advise your clients to keep a record of any agricultural property and the agricultural use and purpose of their assets.
Clients should review their planning regularly or when a significant change occurs. Regular reviews will enable them to establish further planning or stay informed about legislation changes that may affect their already established planning.
What is Agricultural Relief?
In simple terms, AR is a relief from inheritance tax (“IHT”).
Depending on their circumstance, your clients will either receive the relief at 100% (ensuring they don’t need to pay any IHT) or at 50% when specific requirements are not satisfied. To ensure your clients qualify, it is crucial you understand what classes as Agricultural Property (AP).
Although IHT legislation does not define what constitutes agriculture property, the Inheritance Tax Act 1984 s115(2) (“IHTA 1984”) outlines the types of property and land that come under the banner of “agricultural property”. Within section 115(2), AP is outlined as:
- Agricultural land or pasture
- Woodland and any building used in connection with the intensive rearing of livestock or fish
- Woodland or building occupied with agricultural land or pasture, and the occupation is ancillary to that of the agricultural land or pasture
- Cottages, farm buildings and farmhouses, together with the land occupied with them, are of a character appropriate to the property and includes
- The breeding and rearing of horses on a stud farm and the grazing of horses in connection with those activities
The IHTA 1984 s115 also distinguishes that the relief is available to AP in the following territories:
- The United Kingdom
- Channel Islands
- Isle of Man
- A state within the European Economic Area
The Case Law
There are three significant cases to note when discussing whether or not a property is agricultural in nature.
The case of Richard Williams (Personal representative of Mary Philomena Williams deceased) v HMRC [2005] (SpC500)
Firstly, this case discussed the term “ancillary,” and its use in s115 (2) IHTA 1984 and whether chicken broiler houses were of a “character appropriate” to qualify for AR. In short, the three broiler houses were described as farm buildings. However, they would only pass the “test” in s115 (2) if they were an “add-on.” Unfortunately, because there was no evidence of wider agricultural activities, it failed this test and AR was not available.
The case of Lloyds TSB Bank Plc (Antrobus Deceased) v Inland Revenue (No 1): SCIT 17 Oct 2002
Secondly, when determining the status of a farmhouse, this case considers several factors to establish whether the “character [is] appropriate to the property” – in essence, it evaluates the relationship between farming activities and the client’s property. The factors considered include the “size”, “proportion” and nature of the house relative to the farming activities. Furthermore, the case considers whether an educated rural layman would consider the property a farm or a house with land.
Dixon v Inland Revenue [2001] UK SPC 00297 (22 October 2001)
This last case determined whether a cottage, garden and orchard would be considered AP. Excess fruit from the land had been sold and neighbouring farmers utilised the ground for animals to graze. The court considered and found that the cottage did not have the relevant attributions to be considered AP. The court concluded that the property was not agricultural as the owner had not relied on the activities for her livelihood.
Period of Ownership
When taking instructions, you must understand how long clients have owned the AP. To satisfy the conditions of AR, clients will need to demonstrate and show the length of their ownership, as well as the status of occupation prior to the lifetime gift or transfer on death as outlined in IHTA 1984, s117.
To claim AR, clients will therefore need to satisfy one of the two conditions:
- Where clients own and occupy a property, they must prove their ownership for two years prior to the transfer, during the lifetime or on death. Ownership can additionally be through a company controlled by them or a spouse or civil partner. However, they must again demonstrate that the property has been utilised for the purposes of agriculture for two years prior to the lifetime gift or transferor’s death;
- If clients own the property but do not occupy it, then they must show proof of ownership for seven years. The clients will need to show that the property has been utilised throughout their ownership for agricultural purposes, but it does not matter who occupies the property during the period.
Ownership and Trusts
When taking instructions from your clients, ensure you have a complete understanding of all the assets they hold; this is to ensure that AR is applied for and not wasted. It is worth considering whether clients will adequately deal with agricultural property.
When agricultural property is held in Trust, the legal owners are the trustees. The trustees are legally responsible for the management of the property and are considered the occupiers of AR.
There are several key questions to consider:
- Has the agricultural property been left as a specific legacy? (This is vital.) This is to ensure that the relief is not “wasted” on chargeable beneficiaries i.e. spouse or civil partner. The form of this legacy is often prudently drafted to include “any assets that I own at the date of my death to which AR may apply”
- Has agricultural property fallen into the residuary estate? (s39a IHTA 1984) The negative consequence is that the residuary estate could be left to an exempt beneficiary i.e. a spouse or civil partner, who would already be exempt from IHT on the death of the spouse or civil partner
- Does the will direct specific agricultural legacies to chargeable beneficiaries? s39a IHTA 1984 may be advantageous in apportioning the relief between exempt and non-exempt beneficiaries
Help Clients to Maximise and Secure AR
Do you have any further questions about Agricultural Relief? CTT Group’s advisors are on hand to help you with your queries and ensure your clients don’t waste opportunities for AR. Get in touch today for support.
This article was submitted to be published by CTT Group as part of their advertising agreement with Today’s Wills and Probate. The views expressed in this article are those of the submitter and not those of Today’s Wills and Probate.
