Hanson v HMRC [2012] UKFTT 95 (TC) 

The First-tier Tax Tribunal has held that when determining whether a farmhouse qualifies for agricultural property relief (APR) from inheritance tax, the farmhouse and the land to which it is of a “character appropriate” must be in the same occupation, but need not be in the same ownership.

A reminder of where “character appropriate” comes from:

Agricultural property” is defined for APR purposes in section 115(2) of IHTA 1984 as meaning:

• Agricultural land or pasture.
• Woodlands occupied with (but ancillary to) agricultural land or pasture.
• Buildings used in connection with the intensive rearing of livestock or fish, provided the buildings are occupied with (but ancillary to) agricultural land or pasture.
• Farmhouses, cottages and farm buildings, and the land occupied with them (such as garden or grounds), that are of a character appropriate to the property described above.

Some background

Immediately before his death in December 2002 Joseph Charles Hanson was the life tenant of a trust created by his father in 1957.  The trust held a property that both parties in this matter agreed was a “farmhouse” for APR purposes and had an open market value in December 2002 of £450,000.

Mr Hanson’s son lived in the farmhouse which he had occupied since 1978 under a rent free licence. From there the son farmed 215 acres of land of which 128 acres was owned by the son and 25 acres was part owned by Mr Hanson.  The remainder of the 215 acres comprised 20 acres rented by the son from a third party and a further 42 acres whose ownership was unspecified.

The only land in common ownership and common occupation with the farmhouse was the 25 acres part owned by Mr Hanson and farmed by the son.

Following Mr Hanson’s death his executors claimed APR on the value of his interest in the farmhouse.  HMRC denied the relief on the basis that there was insufficient agricultural land in both common ownership and common occupation with the farmhouse for the farmhouse to pass the “character appropriate” test.

The son appealed the decision in his capacity as sole trustee of the trust arguing that common occupation was the only connecting factor required between the farmhouse and the agricultural land to which it was of a character appropriate.  The Tribunal agreed with the son.

This decision may be of significance in situations where a downsizing farmer has moved out of the farmhouse and gives away much of the agricultural land.

This decision is likely to be appealed by HMRC.

The full judgment is available here.

HMRC v Atkinson 2011

The Upper Tax Tribunal has allowed HM Revenue & Customs’ appeal in the case HMRC v Executors of Atkinson.

The decision allows HMRC to refuse agricultural property relief on a farmhouse because the farmer had gone into in a care home just before his death. The executors were unrepresented at the appeal because they could not afford to pay HMRC’s costs if they lost.

The farm was owned by the deceased and let to a farming partnership.  The deceased was a partner in the farming partnership and lived in a bungalow situated on the farm until ill-health meant he had to move into a care home.  The deceased still made occasional visits to the bungalow and his possessions remained in it until his death.

HMRC had refused the Executors’ claim for agricultural property relief because they were of the view that the bungalow was not occupied for the purpose of agriculture for the relevant period required by section 117 of IHTA (“Inheritance Tax Act 1984”).   The First Tier Tribunal allowed the Executors’ appeal.

On the basis of the findings of fact the First Tier Tribunal concluded that, for the purposes of the IHTA, the partnership was in occupation of the bungalow up to the date of Mr Atkinson’s death and that such occupation “was for the purposes of agriculture in the relevant sense because the bungalow was still used to accommodate the diminishing requirements of the senior partner”.

Section 117 (b): “… section 116 above does not apply to any agricultural property unless –

(a)    It was occupied by the transferor for the purposes of agriculture throughout the period of two years with the death of the transferor, or

(b)   It was owned by him throughout the period of seven years ending with that date and was throughout that period occupied (by him or another) for the purposes of agriculture.”

Section 116 grants relief for agricultural property.

Note. There is no definition of the word “occupied” nor is any special given to the words “for the purposes of agriculture”.

The question for the Upper Tribunal was whether the First Tier Tribunal made an error of law when they arrived at a decision of fact which no tribunal properly directed could properly have reached.

The Upper Tribunal found that the First Tier Tribunal did make an error in law.

“Were the matter for us, we would have no hesitation in concluding that the partnership ceased to occupy the bungalow for the purposes of agriculture when Mr Atkinson moved to the care home with no reasonable prospect of ever returning home.”

“In our judgment, the [First Tier] Tribunal failed to apply the correct approach and ask the correct questions.  The correct approach is to identify what does and what does not amount to a sufficient connection between the use and occupation of the property in questions (the bungalow in the present case) and the agricultural activities being carried on on the agricultural property (the farm in the present case); and to ask whether the facts give rise to a sufficient connection.”

“If the [First Tier] Tribunal had adopted such an approach it could, in our judgment, have come to only one conclusion, namely that the bungalow was not immediately before Mr Atkinson’s death, occupied for the purposes of agriculture and had not been since, at latest, it had become apparent that he would never be able to return there to live.  In particular neither the occasional attendance of Margaret [his daughter-in-law] and Gary [his grandson] at the bungalow to deal with post or frost, nor the fact that some of Mr Atkinson’s belongings and furniture remained at the bungalow, can be said to constitute occupation for the purposes of agriculture throughout the seven years prior to Mr Atkinson’s death.”

The full report of the Upper Tribunal can be found here.

HMRC has published an updated Inheritance Tax Toolkit effective for deaths occurring from 6 April 2010. Updates include emphasising the importance of providing HMRC with a copy of the will and any codicils when submitting the form IHT400.

These toolkits provide guidance on areas of error that HMRC frequently see in returns and set out the steps that you can take to reduce those errors.

The toolkits can be found here.