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05 April 2011
Farmland and cottages are owned by two discretionary settlements with the farmer’s personal company being the tenant under the Agricultural Holdings Act
A farmer wishes to pass his business on to the next generation. More than 1,000 acres and some cottages are owned by two discretionary settlements and the farmer’s personal company is the tenant under two Agricultural Holdings Act (AHA) tenancies from the 1950s, the rent payable being about £3,000pa in total.
Cottages no longer used by farm labourers are let under assured shorthold tenancies (ASTs) by the company. The farmer also owns around 500 adjoining acres that are let to the company under a more recent AHA tenancy.
The ten-year inheritance tax charges will be due in two and four years’ time and only 50% agricultural property relief will be available on the farmland and buildings, with no relief on the cottages let under ASTs. The compensation that may be due to the company if the AHA tenancies are surrendered could be well over £2 million.
If the trusts, the farmer and the company formed a partnership into which the trustees and the farmer added the land they own (retaining 100% of the capital on their respective capital accounts), do readers consider that the rent under the AHA tenancies could still be paid either as rent or a first share of profit equal to the rent so that the AHA tenancies did not come to an end?
If so, could 100% agricultural property relief be claimed at the ten-year charge? If the number of cottages let were such that business property relief was not under threat, could 100% relief also be claimed on the interest in the partnership? These issues are also relevant to the farmer’s own inheritance tax planning.
Query 17,774 – Unsettled
Reply from Taxplanet
The suggestion made by Unsettled will not result in an either increased agricultural property relief (APR) or business property relief (BPR). At present, the landlord in relation to each of the let properties is the trustees of the discretionary trust that owns the land. The tenant is the farming company.
An Agricultural Holdings Act (AHA) tenancy cannot be assigned, and so after the proposed changes the landlord and tenant are the same. The only thing that changes is that the user of the land is a partnership consisting of the trustees, the company, and an individual who is the controlling shareholder in the company, in place of the company.
There are four types of case where 100% APR is available, three statutory and one by concession. The statutory cases are at IHTA 1984, s 116(2)(a) to (c).
None of those would apply to the new arrangements. Following the change, the trustees as transferors:
- do not have the right to vacant possession within a 12-month period;
- cannot satisfy the working farmer conditions at 11 March 1981; and
- do not let the land on a tenancy begin-ning on or after 1 September 1995.
Extra-statutory concession F17 grants 100% APR in deemed vacant possession cases where the transferor’s interest in the property is, notwithstanding the terms of the tenancy, valued at an amount broadly equivalent to the vacant possession value of the property.
Would the trustees’ interest in the property if lotted with their interest in the partnership as a valuation unit be valued at vacant possession value? It seems unlikely given that the tenancy would remain as the property of the farming company and cannot become property of the partnership.
BPR could only apply to the value of the former farm cottages if, following Farmer & Giles (Farmer’s Executors) v CIR [1999] SSCD 321 (SpC 216), the partnership was carrying on a hybrid business of farming and letting in which the farming predominated. This will not be the case if the company remains as the tenant of a non-assignable tenancy.
An alternative would be to examine whether the trustees could improve their APR position if there was a surrender of the tenancy by the company followed by an immediate re-grant of the tenancy by the trustees over the same acreage, and on the same terms.
HMRC appear to agree that this is a route to 100% APR – see guidance in the Inheritance Tax Manual at IHTM24143 and IHTM24241.
What is the capital gains tax position if the company tenant surrenders its tenancy? The tenancy will be valued at open market value if landlord and tenant are connected persons (TCGA 1992, s 18) and, if they are not connected, the disposal proceeds are whatever the company receives in consideration for the disposal, in money or money’s worth. Unsettled assumes that the tenancy has a high market value, but does it?
The Court of Appeal decision in Greenbank v Pickles [2000] All ER (D) 1479 shows how easy it is to confuse the vacant possession premium with the open market value of the tenancy, and demonstrates that the tenancy will normally have a modest value, using a profit rental approach, in circumstances where the tenant intends to continue farming and there is no intention on the landlord and tenants’ part to realise the vacant possession value by way of a sale following the surrender of the tenancy.
If the landlord and tenant are not connected persons, the consideration received by the tenant for the surrender of the old tenancy is the value of the new tenancy. Again, it is suggested that if the new tenancy provides for a market rent to be paid with the rent being reviewed annually the new tenancy will have little or no value.
The surrender and re-grant would do nothing to improve the BPR position. The trustees would remain as landlords and relief would be prohibited by IHTA 1984, s 105(3).
Where there could be a shift in value is towards the landlord, if it is considered that value can be attributed to the increase in APR from 50% to 100% and a future reduction in the ten-year charges. If that reduction in tax can be valued, and the trustees are shareholders of the company, it might be argued that there had been a shift in value from the company to the trustees as shareholder which might be taxed as a distribution, but on the facts given it seems unlikely that is the case.
The writer is not a qualified valuer and the valuation approaches suggested, and the examination of values, should be undertaken by a qualified valuer with experience of valuing agricultural tenancies.
