A Taxing Issue

Dec 14, 2022

As some of you might have seen in the agricultural press, HMRC is ramping up investigations into agricultural property relief (APR) with reported inspections increasing by nearly 30% in the year to March 31, 2022.* 

The reason for the spike is likely to be two fold. Firstly, it is a rebalancing of activity from the COVID pandemic when investigations were scaled back, and secondly, with the government trying to balance the books as a long recession appears on the cards, they’re looking to maximise income from all sources.  

APR is a very valuable relief from Inheritance Tax as it effectively exempts agricultural assets from death duty and allows them to be passed on to the next generation.  

But the benefit comes with conditions, and it is in not abiding by these that some farmers come unstuck. This can be an extremely costly mistake, however, and all efforts must be made to ensure farmers don’t lose APR and end up bestowing huge tax bills on the next generation when the assets are passed on.  

The elephant test  

One of the main areas of contention when it comes to APR is the farmhouse. Until a few years ago, it was possible to get 100% APR on farmhouses but recently the law has been interpreted differently, meaning in many cases as much as 30% of the value of the farmhouse might not qualify.  

Now for the farmhouse to qualify, it must pass the Elephant Test.  

The Elephant Test came out of a legal case that was scrutinising the eligibility of a farmhouse for APR. The presiding judge said that you would know an elephant if you saw one and that a genuine farmhouse was the same – you could immediately recognise a genuine one when you saw it.  

The official name for this is character appropriate, which unfortunately is a rather subjective view. What it basically means is that to qualify for APR, a farmhouse must be in keeping with the rest of the farm.  

If, for example, you live in a three bedroom house with a muddy porch that sits on 500 acres of land you farm yourself, then it is highly likely the house will qualify for 100% APR. That is because it is proportion to the size of the land being farmed and the income derived from that land. It is also obvious that the dwelling is used by the farming family.  

If, on the other hand, you live in an eight bedroom mansion surrounded by 50 acres, and you try to claim APR on the house, well you might be in for a shock. Or at least, you will when the HMRC turn up to investigate.  

The simple fact is, an eight bedroom mansion is in no way proportion to a small holding of 50 acres so would not be considered character appropriate to the level of farming activity that could take place, and therefore wouldn’t qualify for APR.  

Obviously, these are two extremes, and in between lies many a grey area.  

Another related area to watch out for is the addition of leisure items such as a swimming pool or tennis court. As nice as they are to have, swimming pools and tennis courts are not integral to farming, so the extra value they bring would not qualify for APR.  

Other reasons for investigation  

After issues with the farmhouse, the most common reason why farmers lose APR is down to changes in the use of land. The regulations state that to qualify for APR, land must be used for agricultural purposes such as growing crops or rearing livestock for two years before it is passed on if occupied by the owner, or seven years if it is not.  

Therefore, if HMRC becomes concerned the land is not being used for commercial agriculture, it will launch an investigation. If the investigation proves HMRC’s suspicions and the land is being used for something else, APR is likely to be lost.  

Another farmhouse-related problem that could spark an investigation is if you live in the farmhouse but don’t farm the land yourself. In this circumstance, the land may well qualify for APR but the house may not. So, if you’re claiming APR for the full estate, you may get a knock at the door.  

Other situations that will lead to an investigation and the loss of APR include using farmworker accommodation as a holiday let, the non-agricultural use of farm buildings, and turning land over to non-government run rewilding schemes.  

A cottage with an agricultural occupancy condition that is used a holiday let will no longer be eligible for IHT and may even lead to the owner being served with a planning notice. As well as losing APR, business property relief (BPR) is unlikely to apply either, as HMRC regards holiday accommodation as an investment activity rather than a business activity.  

For farm buildings to qualify for APR, they must be in agricultural use and not left empty or derelict, or be employed for some other use such as storing caravans or converted into stables. Any such breaches will incur a loss of APR.  

Rewilding schemes are more complicated. Land that is put into government-run environment schemes are eligible for APR, but not if a third party plants trees of rewilds the land outside of available schemes, so farmers need to be aware of this.  

APR is also available on land where trees are ancillary to the farmland such as in a shelter belt and does not cover a large area compared to the whole farm.  

Honesty is the best policy 

When it comes to claiming APR, honesty is always the best policy and the way to avoid an investigation.  

However, if you’re concerned about whether you are claiming APR correctly, or you want to apply but are not sure which parts of your farm quality, get in touch on (01295) 270200 or email ianp@whitleystimpson.co.uk 

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