17 Nov 2017

Real-life farming

25 March 2015

Essentials of a successful claim to agricultural property relief


  • A direct involvement in farming is not necessary for agricultural property relief to apply.
  • Are buildings of a “character appropriate”?
  • Non-farming activities may be within the relief.
  • The relief only applies to agricultural value.
  • Relief for a lifetime gift will depend on the donee’s use.

Agricultural property relief (APR) is a hugely valuable inheritance tax relief and, in some respects, it may have a wider appeal than its sibling, business property relief (BPR).

This is because it is longer necessary to demonstrate that the taxpayer is directly involved in farming to secure the base relief, although this does have an impact on the more ancillary components falling under the agricultural umbrella.

However, APR is universally misunderstood and this often leads to potentially costly consequences for the adviser and the client. The relief is always an area of contention with HMRC and, as a consequence, all but the smallest claims are subject to intense scrutiny and challenge.

The moral is clear: tread with great care, never assume that the relief is in point, thoroughly check all aspects, consider the impact of the ever-growing raft of case law decisions and, most importantly, always carry out a site visit.

The relief works very much in tandem with BPR so that the two must often be considered together when undertaking any form of inheritance tax planning. Notwithstanding this, IHTA 1984, s 114 places APR in pole position and it must always be considered before BPR. 


Morgan is a property investor who, on 31 January 2010, bought Hilltop Farm as an investment. He let the farm to Douglas who farms the land as well as his own.

Hilltop Farm has a value of £3m. This comprises an agricultural value of £2m and a development premium of £1m because it is likely that part of the land can be sold for industrial development in the future.

Although Morgan does not farm, he can “piggy back” on Douglas’s qualifying farming activity to gain access to APR.

However, he must wait until 31 January 2017 before he is entitled to APR on the agricultural value of £2m.

BPR is not available on the development premium because Morgan is not the farmer nor has ever farmed the land.

Qualifying assets

On the surface, the legislation set out in IHTA 1984, s 115 et seq appears straightforward. It defines “agricultural property” as agricultural land or pasture, but it specifically includes:

  • Woodland if occupied with agricultural land and pasture and that occupation is ancillary to (meaning it does not dominate) the occupation of the agricultural land or pasture.
  • Any building used in connection with the intensive rearing of livestock or fish if that building is occupied with the agricultural land or pasture and the occupation is ancillary to that of the agricultural land or pasture.
  • Cottages and farm buildings together with land occupied with them as are of a character appropriate to the property.
  • Farmhouses together with land occupied with them as are of a character appropriate to the property.

Although not falling within the strict heading of agriculture, the legislation further extends the relief to include:

  • The breeding and rearing of horses (to include stud farms even if no stallion is permanently present at the farm) and the grazing of such horses.
  • Short rotation coppice, where a perennial crop of tree species is planted at high density, the stems of which are harvested at intervals of less than 10 years.
  • Farmland and related buildings that have been dedicated to wildlife habitats.

Agricultural purpose

Unhelpfully, “agriculture” is not defined in the legislation and must take its ordinary meaning. The term is defined in the Agricultural Tenancies Act 1995, s 38(1) as including:

“…horticulture, fruit growing, seed growing, dairy farming and livestock breeding and keeping, the use of land as grazing land, meadow land, osier land, market gardens and nursery grounds, and the use of land for woodlands where that use is ancillary to the farming of land for other agricultural purposes, and ‘agricultural’ shall be construed accordingly…”.

The following therefore fall outside this definition:

  • Woodland not occupied with agricultural land and pasture.
  • Buildings used for the rearing of birds or fish for sport.
  • Agricultural buildings that, by their size, dominate the land enjoyed rather than being ancillary thereto.
  • Paddocks for ponies used for riding or recreational purpose.
  • Farms not occupied for agriculture (apart from set aside).
  • Farmhouses of character not appropriate.

HMRC show particular interest in farming businesses that are small and typically occupy less than 20 acres or if the owner is no longer actively involved in farming – perhaps by reason of old age or infirmity – or if the buildings are so dominant that the ancillary rule is breached. 


Doris, a lifelong farmer, gave her farm and farmhouse at Follyfoot to her son Richard. At the date of the gift in March 2010, the farm and farmhouse qualified for APR by reference to Doris.

Richard moved into the farmhouse and continued to farm until December 2014 when he stopped due to ill health.

He sold the farmland to a neighbouring farmer and invested the proceeds in quoted stocks and shares, but continued to live on in the farmhouse.

Doris died in February 2015. Because her death was within seven years of the gift, this brough the clawback provisions into play, tested with reference to the APR position of the donee, Richard.

APR is no longer available on the retained farmhouse because it is now separated from the land. Nor can it be claimed on the quoted investments representing the proceeds of the farm sale.

This latter point was considered in Williams v HMRC [2005] SpC 500 when HMRC blocked an APR claim on the ground that the buildings and land owned by the taxpayer, and which were used in the intensive rearing of chickens in a business undertaken by the tenant, dominated the land on which they stood.

Interestingly, fish farms and stew ponds may be treated as “farm buildings” and are thus eligible for APR in some circumstances, but care must be taken because not every type of fish farm will qualify.

Fish farming in natural lakes will fall within the definition, but probably not when stock are kept separate from the land in artificial tanks and fed on purchased feed. In such cases BPR might come to the rescue.

Farm cottages

The following factors should be considered with regard to farm cottages.

  • APR is denied if the cottage fails the “character appropriate” test.
  • Generally, 100% APR is available if the tenancy began after 31 August 1995 as long as it is an unprotected service tenancy or an assured short hold tenancy.
  • Restricted 50% relief is given if the tenancy is an assured agricultural tenancy unless alternative accommodation is available and/or the vacant possession rule applies.
  • For this purpose “retired” is taken to mean “no longer working full time”, so simply moving to another job outside the farm would not satisfy.

Extra-statutory concession (ESC) F16 extends APR to such cottages occupied by a retired farm employee or their widow or widower if:

  • the occupier is a protected tenant under statute (ie the Housing Act 1988 or the Rent (Agriculture) Act 1976); or
  • occupation is under a lease granted to the farm employee for life (to include a widow or widower) under the contract of employment.

The farmhouse

This is an area of sharp HMRC interest and the department focuses on three specific areas: character appropriate; use; and agricultural value.

Character appropriate

HMRC’s initial approach is to adopt the “elephant test”: it may not be possible to define a farmhouse but it is generally possible to recognise one on sight.

This approach may well serve to dismiss the large or grand property sitting on a small acreage, but geographical comparables might be persuasive to the contrary (see Antrobus Deceased v CIR [2002] STC (SCD) 468).

In practice, there are few difficulties if the farmhouse is modest in size and appearance, has been owned by generations of the same family and it, together with the land, has been occupied by that family for the purposes of farming.

However, as always, the problems begin with those cases that sit at the margins. Substantial and/or grand houses will always struggle to qualify for APR, particularly if there is relatively small acreage perhaps on which few or no farm buildings stand or if all of the land is occupied under a grazing agreement.

The role of the farmhouse must be a functional one and ancillary to that of the agricultural land and it therefore follows that it must not dominate that land.

As a starting point, APR will probably be available for the farmhouse that satisfies the description of “land with a house”, but it is likely to be denied for the farmhouse that falls within the description of “house with land”.

Decided tax cases provide the source material, and careful examination should be made of the key criteria as indicated in the following cases.

  • Lloyds TSB Private Banking plc as personal representatives of Rosemary Antrobus Deceased v CIR [2002] STC (SCD) 468 – 126 acres dominated by a listed grade II substantial mansion.
  • Rosser v CIR [2003] STC (SCD) 311 – gift to farming daughter of 39 acres out of 41 acre holding leaving two acres farmed by the taxpayer.
  • Arnander, Lloyd & Villiers (McKenna’s Executors) v HMRC [2006] SSCD 800 – a grand grade II listed house, but in poor condition, sitting in 187 acres of mixed use land.
  • Higginson’s Executors v CIR [2002] STC (SCD) 483 – a valuable house set in landed estate with minimal farming activity.
  • Golding’s Executors v HMRC FTT [2011] UKFTT 351 (TC) – an elderly and infirm taxpayer operating a non-profitable farming activity.
  • HMRC v JN Hanson (Trustee of the William Hanson 1957 Settlement) [2013] STC 2394 – a tenant-occupied farmhouse set in farmed land owned by tenant and landowner. 

Rebecca had a substantial farm that she farmed and which amounted to more than 300 acres together with a farmhouse, outbuildings and cottages.

It had always been assumed by Rebecca and her advisers that the whole property would qualify for APR, but an analysis of the activities carried out highlighted the following points.

Fact: Some 70% of the land had been sublet to individuals to provide accommodation for horses that were used for leisure activities.

Conclusion: Because only 30% of the land is used for agricultural activities the residual farming activities would probably not justify the requirement for a farmhouse. The land that is farmed would still qualify for APR on the agricultural value (Rosser v CIR [2003] SSCD 311).

Fact: Half of the outbuildings had been converted to office accommodation for a range of businesses loosely connected with country businesses, but which were certainly not farming. The land near the buildings was used as a recreation area for the occupants.

Conclusion: Neither the land nor the buildings would qualify for APR. Those outbuildings required for the 30% of land that was farmed would qualify for APR on the agricultural value, as did the farmland that was still farmed (Rosser v CIR [2003] SSCD 311).

Fact: The other farm buildings were used in the farming business, but some were in such poor state that they could not be used even for the storage of equipment.

Conclusion: No APR would apply to the derelict or empty buildings.

Overall assessment: Commercially, the rate of return on the land had improved, but perhaps at a cost of any available APR (or BPR).


Having satisfied the character appropriate test, the farmhouse use cases will fall into three scenarios broadly as follows.

a. The owner occupant of the farmhouse is the working farmer who directs the day-to-day farming activities.

b. The tenant occupant of the farmhouse is the working farmer who directs the day-to-day farming activities.

c. The tenant is the working farmer who directs the day-to-day farming activities on the tenanted land, but the occupant of the farmhouse is the landowner.

As long as the character appropriate test is met, the farmhouses in (a) and (b) will qualify for APR on the ground that the occupant (whether tenant or landowner) is the person farming the land, which is not the case for (c).

However, problems arise if the farmhouse is unoccupied at the point of test and thus not “occupied for the purpose of agriculture”. See HMRC v Atkinson & Smith (WM Atkinson’s Executors) [2012] STC 289.

Agricultural value

APR is restricted to the agricultural value of the farmhouse. This is the value of the property should it be subject to planning restrictions that would permit it to be occupied only by an individual involved in agriculture.

In many cases, but not all, open market value will be more than agricultural value with the extent of the premium depending on the location and its amenity value.

Thus, the premium for a farmhouse within commuting distance of London is likely to be greater than that on a farmhouse in mid-Wales.

Typically, agricultural value is between 60% and 75% of open market value, but it is also possible for there to be no disparity between agricultural and market values.

Importantly, and despite HMRC’s insistence, there is no “standard discount”.

Ownership, scope and debts

There is a strict requirement providing for a minimum ownership period which, unlike BPR, pivots on the involvement of the transferor for these two periods.

  • Two years if the taxpayer farms the land in hand.
  • Seven years if the land is farmed by a third party.

This is illustrated by Morgan (above).

APR is not available on worldwide assets but, in bowing to EU pressure, the territorial boundary that was previously restricted to the UK is now extended to include the Channel Islands, the Isle of Man and any EEA member state.

FA 2013 radically changed the way in which debts attributable to APR (and BPR) property are taken into account when computing the available relief.

The current rules have an impact on transfers of value made on or after 17 July 2013, but apply from 6 April 2013 where new or refinanced liabilities have been incurred; established borrowing continues to be treated under the old rules.

Importantly, the current rules apply to direct or indirect borrowing in that the latter will involve a review of tracing procedures.

Under the old rule, the debt, even if used to acquire APR property, is set against the asset on which it is secured even though this may not itself be APR property.

Repositioning of the liability against non-relievable assets thus preserved the maximum APR for a qualifying asset.

Under the current rule, irrespective of the nature of the asset against which the debt is secured, to the extent that the debt was used to acquire APR assets it must be set against those assets before the relief is given.

As previously stated, if an asset qualifies for both APR and BPR, IHTA 1984, s 114 directs that APR is given priority and BPR applies to any unrelieved excess.

This same treatment flows through to the alignment of borrowing. Accordingly, it follows that, where such borrowing exceeds the agricultural value of the asset, APR is erased in its entirety and the balance of any unrelieved debt is set against the non-agricultural value when considering any claim to BPR.

APR and replacement property

There are two rates of APR. The 100% rate applies if:

  • the transferor has the right to vacant possession of the property or can achieve vacant position within 12 months (extended to 24 months by concession);
  • the property is valued at an amount broadly equivalent to vacant possession notwithstanding the terms of the tenancy;
  • the transferor was entitled to his interest before March 1981 but satisfies the “working farmer relief” rule; or
  • none of the above applies and the property is let on a farming business tenancy that started on or after 1 September 1995.

The 50% rate applies in all other cases, but is typically restricted to tenancies granted under the old Agricultural Holdings Act.

Although less common in farming, where longevity of ownership persists, IHTA 1984, s 123 enables preservation of the original ownership period for nominated replacement property, but the time limit for reinvestment pivots on the involvement of the transferor.

Thus, both the original and replacement property must have been held for a minimum of:

  • two of the previous 10 years if the transferor farmed the land; or
  • seven of the previous 10 years if the land has been farmed by a third party.

Clawbacks and capital gains tax

It is a common misunderstanding that, once the minimum ownership period has been met, a later lifetime gift of that agricultural property will qualify for APR and secure immediate inheritance tax immunity; this is simply not the case.

Although a lifetime gift from one individual to another may qualify for APR when made, it will nonetheless remain a potentially exempt transfer (PET) and will not be subject to inheritance tax if the seven-year survival period is met.

If the PET fails, it will be tested for APR at the earlier of the donor or donee’s death, but its status at that time will be viewed from the donee’s and not donor’s perspective.

This clawback action, which also applies to chargeable lifetime transfers, causes problems and can lead to real tax damage, as illustrated in Richard (above).

As with a PET, a chargeable lifetime transfer (CLT) of an APR asset (typically into trust) must also be retested for APR qualification on the death of the settlor within seven years.

However, clawback operates differently for a CLT which simply requires recalculation of the inheritance tax without the benefit of APR, but does not alter the donor’s cumulative lifetime clock. In the case of a PET there is an adjustment to cumulative lifetime clock.

On capital gains tax, there is a close link between this and inheritance tax with the former normally assuming prime position. An asset qualifying for APR will remain eligible for business property holdover relief under TCGA 1992, s 165

irrespective of whether the property concerned is farmed by the transferor or farmed by a third party. Accordingly, the preservation of APR by operation of the end user is critical.


This article provides only a snapshot of APR, but should demonstrate the complexity of the subject. There are many issues that will influence the eligibility and strength of a successful claim, and the APR Checklist (below) is merely a guide of matters that must be considered.

It should not be assumed that, simply because a client lives on a farm that the landowner/occupier is actually a working farmer or that it is a working farm or that all assets qualify.

Consider the example of Rebecca (above), which illustrates the importance of taking the real life aspects into account when considering the potential tax implications. 

  • How long has the property been owned?
  • In what capacity is the property owned?
  • If tenanted, when did the tenancy start?
  • Are the day to day farming decisions organised by the occupier of the farmhouse?
  • What activities are being carried out on the farmland and by whom?
  • Is any of the land sublet for non-core farming or leisure activities and if so to what degree?
  • Are all of the farm buildings occupied/used in the farming business? Redundant or derelict farm buildings may restrict relief.
  • Have any of the farm buildings been sublet for non-agricultural purposes?
  • What is the open market value of the farmhouse and its agricultural value? A robust, formal valuation is required.
  • What is the open market value and the agricultural value of the farmland? Again, a robust and formal valuation is required.
  • Is there hope/development/premium value (development, mineral extraction or more likely, amenity value)?


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