We act for a farmer who has commenced a diversification process into the following areas.
- He has fully converted the attic and loft space in the farmhouse to separate living accommodation (fully furnished), from which he receives a rent.
- He has dug out a fishing lake, stocked the lake and is charging rent to an angling club.
Our specific queries are as follows.
We act for a farmer who has commenced a diversification process into the following areas.
- He has fully converted the attic and loft space in the farmhouse to separate living accommodation (fully furnished), from which he receives a rent.
- He has dug out a fishing lake, stocked the lake and is charging rent to an angling club.
Our specific queries are as follows.
1. Do we show the rental income as a separate source of Schedule A income away from the farm as expenses exceed rents; otherwise he would receive relief for the losses against farm income?
2. Can he claim rent-a-room relief if this is preferable in future (i.e. expenses will be lower in future)?
3. How does this affect inheritance tax relief on the farmhouse?
4. Should VAT be charged on the rent for the fishing lake?
5. What allowances are available for digging out a lake and is the fish stock treated as an expense as its resale value would not be the same; i.e. how is closing stock valued?
Readers' comments on these points would be gratefully received.
Query T16,664 — Izaak.
Reply from Belgravia:
Minor receipts may be included within a farming business (see Business Income Manual, BIM55220 to BIM55225 and ITTOIA 2005, s 22. However, the rental income here is clearly not minor and should be separately shown as from a property business under ITTOIA 2005, Pt 3 unless rent-a-room relief is available and is claimed. Under ITTOIA 2005, s 787(2) a division of a building into two or more residences is to be treated as one residence only if the division is 'temporary'. The Property Income Manual at PIM4004 gives HMRC's view of this, but from the facts given it is unclear whether the farmer has made such a 'temporary' division.
Under IHTA 1984, s 117, agricultural property only qualifies for inheritance tax agricultural property relief if it is occupied for the purposes of agriculture. There is no suggestion here that the occupier of the converted attic is so occupying it (e.g. Izaak does not suggest he is an agricultural worker). Thus, part of the value of the farmhouse — in practice an apportionment by area is made, though rental value or capital value could be argued as an alternative — will not be agricultural property. There may, curiously, be an advantage in this. Given the diversification from agriculture, it may be increasingly difficult to argue that the farmhouse remains of a character appropriate to 'the property' (IHTA 1984, s 115(2)) — i.e. the farmer's agricultural land or pasture. A reduction in 'agricultural' land or pasture appears to have been accompanied with a reduction in the size of what constitutes the farmhouse that is agricultural property after s 117 has been applied, and this may make it easier to satisfy the character test of s 115(2) on the smaller farmhouse that remains. As an addendum, the lake is not a farm building within s 115(2) — though it could be if it was used to breed fish for human consumption rather than for angling.
Izaak refers to 'rent' being paid for the lake, which suggests the club has more than a mere licence. VATA 1994, Sch 9 Gp 1 Item 1(c) standard rates such a lease, although an apportionment may be required between the standard-rate supply of the right to take fish and the exempt supply of the lease of the land (VAT Notice 742, para 6) under Sch 9 Gp 1 Note (8), unless the option to tax has been exercised in respect of it. Should the fishing rights be exceedingly valuable, a different arrangement might be considered; e.g. a sale of freehold of the lake and its surroundings to a separate company (an exempt supply unless the option to tax has been exercised) that issues shares giving rights to fish.
As 'rent' is being paid, it seems likely that the farmer is not providing sufficient additional services for the activity to amount to a separate trade. Therefore, the income would be from the exploitation of land and again this would be income from a property business within ITTOIA 2005,
Pt 3. The digging out of the lake is capital expenditure on a structure. Although fish-ponds as a structure are not automatically barred from qualifying as plant (CAA 2001, s 23(4) Item 30), it is unlikely that this lake would qualify as plant as the fish-pond exception is likely only to apply to ponds at garden centres or at fish farms.
The supply of the fish is not within the ambit of income from a property business and as such the cost of stocking cannot be allowed as a deduction. It may be that the farmer should charge a separate fee for taking fish (rather than returning them to the lake) so that this might give rise to income not otherwise charged under ITTOIA 2005, Pt 5 Ch 8 (the old Schedule D, Case VI). If that were the case, it may be arguable to allow the cost of restocking on a renewals basis, which I have seen before.
Reply from JdeS:
Letting the attic does not constitute 'the occupation of land for the purposes of husbandry' under ITTOIA 2005, s 876(1) (all references are to that Act unless stated otherwise) or thus farming under s 9, the loss on the letting will, therefore, only be carried forward against the s 264 statutory property business. Assuming the other qualifying criteria are present, rent-a-room relief automatically takes the net rents outside of the income tax charge unless the taxpayer elects under s 799. To qualify, however, s 786(1)(a) requires the furnished accommodation to be 'in' the taxpayer's only or main residence. If the converted attic was a separate dwelling for planning (and council tax) purposes, this would not be the case.
IHTA 1986, s 115(2) does not address this type of issue in terms; it merely looks at the peculiarities of that farmhouse in the context of the relevant farmland. HMRC could base their opposition to agricultural property relief on s 115(3), which would take out the value of the attic if it was a separate dwelling. But the question would then arise as to whether business property relief could be claimed on the basis that the farmer was managing the 'business' end of the rent a room and it constituted a very small part of the turnover of the totality (i.e. when integrated with the farm). Furthermore, although HMRC have not hitherto been willing to accept this construction, the attic must be regarded as just as much an integral part of the farmhouse (which, in its turn, must plainly be an integral part of the farm) as to enable the taxpayer to call in aid Executors of the Eighth Marquess of Hertford v CIR [2005] SSCD 177 and claim unrestricted business property relief under IHTA 1984, s 112(2)(a). It is, moreover, important to appreciate that in such circumstances (and contrary to the official 'line'), s 112(4), which would not assist in isolation in these circumstances, does not come into the equation.
VATA 1994, Sch 9 Grp 1 Item 1(c) standard rates a right, i.e. a tenancy, or licence 'to take game or fish'. On any construction, VAT has to be charged on the 'rent' paid by the club. These receipts seem likely to be from a property business. To be a trade, it would be necessary to run the angling club, rather than provide premises.
Either way, it is difficult to arrive at a 'closing stock' to value because fish are ferae naturae and incapable of being owned (let alone counted in a stocktake). Under the same line of thought, however, were the activity to be a trade, the cost of re-stocking the lake after the first year could not be treated as capital expenditure under Atherton v British Insulated and Helsby Cables Ltd 10 TC 155. HMRC should, nonetheless, be expected to resist treating the initial stocking in a newly created environment as other than capital expenditure.
Whilst the intensive rearing of fish qualifies as 'husbandry' for agricultural buildings allowances under CAA 2001, s 362(1)(a), this is not within that description. It might also prove difficult (perhaps not impossible) to persuade HMRC to treat the excavation of a lake as 'other works' within CAA 2001, s 361(1)(a). There are two problem areas with claiming machinery and plant allowances. First, a site as big as a lake (as opposed to, perhaps, a series of ponds) would be on the wrong side of the line in the 'plant with which'/'setting in which' the activity is carried on, case law. Secondly, its construction seems to come within CAA 2001, s 22(1)(b): 'any works involving the alteration of land', as opposed to the erection of a 'structure'.
