Agricultural Property Relief from Inheritance Tax – the Older Farmer: a Case Study

Please note that this News item is not maintained, and reflects the law as at the date of publication or update.

Jonathan Midgley’s specialist Rural and Agricultural team at Gaby Hardwicke have recently concluded a case in which they achieved a successful outcome for the estate of a local farmer in the face of stiff opposition from HMRC.

The facts of the case are likely to resonate with many families in the farming community, and in particular elderly farmers looking to safeguard their assets for future generations.

Prior to her death Peggy Cain owned and ran her farm in East Sussex for most of her life, initially as a dairy farm and gradually transitioning to arable farming, hay-making and grazing in the late 1990s. The farm comprised a Grade II listed farmhouse, a range of traditional and modern farm buildings, and a mixed holding of pasture, arable and woodland.

When Peggy died HMRC argued that they did not consider Peggy’s farming activities to be sufficient in her later years for her estate fully to qualify for Agricultural Property Relief (APR) from Inheritance Tax (IHT).   APR is an extremely valuable relief, which can reduce IHT liability on farms, farmhouses and farming assets by up to 100%.

This attack by HMRC is an approach that we are seeing more often in estates involving older farmers, and the impact of losing a case like this can be devastating.  In this instance, if HMRC had succeeded, the size of the IHT bill would likely have required the farm to be sold, despite Peggy’s clear wish that it should continue to be farmed by her heirs following her death.

Peggy was 85 when she died and naturally her physical activities had declined in her later years. She was still active for her age but nevertheless had to outsource work on the farm to contractors. By the time of her death most of her land was grazed by third parties and she had few animals of her own.

The key assertion advanced by HMRC was that the reduced personal involvement of Peggy in the farming operations meant that she was no longer in “agricultural occupation” of her farm, which is one of the essential conditions for a successful APR claim.  To support their position HMRC cited numerous court cases, instructed the District Valuation Office to investigate the matter and even produced historic satellite imagery of the farm, which they used to back up their arguments that:

  1. Peggy’s agricultural activities were no longer enough for her to qualify as a ‘farmer’; and
  2. The arrangements with the graziers meant that it was really they who were controlling the land upon which their animals grazed, and that Peggy had not retained sufficient control of the land to maintain her ‘occupation’.

The critical point is if it cannot be shown that the landowner is still in agricultural occupation APR will likely be denied on what is often the most valuable asset – the farmhouse.

Most farmers operate their businesses on an informal basis, relying on verbal agreements and a ‘handshake’ rather than legal paperwork.  With older farmers in particular, it is highly likely that they will no longer be as directly and personally involved in all aspects of the management of the farm – all of which can play into HMRC’s hands.  When HMRC attack, as they did in Peggy’s case, it can be very difficult to show definitively where the primary responsibility for the land lies. There is often a fine line between a landowner ‘letting’ land as opposed to allowing a grazier to keep their animals on the land while the landowner remains responsible for the upkeep and maintenance.   Frequently there is no clear record of what the landowning farmer’s activities were.  Did they give direction about day-to-day activity on the land?  Did they do the lookering? Repair and maintain the fences, hedges and ditches? Control the weeds? Keep the land in good condition and do the harrowing, rolling and topping?  All of these issues can be relevant to supporting a claim for APR, but where the farmer has died it can be a real challenge to produce sufficient and reliable evidence to counter HMRC.  The Revenue will exploit any ‘grey areas’, when it comes to assessing an estate for IHT.

Jonathan Midgley, as executor of the estate, was assisted by Gaby Hardwicke’s Private Client team in building a robust defence against the HMRC position.   This involved undertaking extensive investigation and gathering information from the various graziers, third parties and contractors involved in with the farm over recent years, preparing detailed witness statements, and forensically analysing the deceased’s paperwork.   This work was designed to demonstrate that Peggy had maintained ultimate control of her land up to her death and that she was certainly not retired, as HMRC effectively alleged.

Drawing on probate and tax case law including the recent Charnley case (William Charnley & Maxwell Hodgkinson as Executors of the Estate of Thomas Hill (deceased) v The Commissioners for Her Majesty’s Revenue & Customs [2019] UKFTT 650 (TC)), Gaby Hardwicke successfully argued with HMRC that despite her age and reduced role at the farm, Peggy’s farming activities were still sufficient for the farm and farmhouse to qualify for APR.

Peggy’s case is a salutary lesson for older farmers in the importance of managing their transition from being the “boots on the ground” to handing over their responsibilities to their heirs or others as they wind down.   In particular, any grazing licences, tenancies, agistments etc. should be carefully reviewed to ensure they do not interfere with the landowner’s agricultural occupation, or if they do that it is a part of a deliberate plan and strategy designed to ensure wealth is passed on in a tax efficient way.

Gaby Hardwicke’s success in this case demonstrates that an aging farmer is perfectly entitled to use contractors to undertake work that they are no longer physically able to do themselves, and this does not preclude the application of APR.   But as ever the devil is in the detail.  Falling foul of the complex rules regarding APR can trigger a substantial IHT liability. Prevention is better than cure, and the sooner any potential issues can be identified the more chance there is that they can be properly resolved and in good time.

For more information on this topic, please contact Jonathan Midgley.

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