Taxation - Antrobus

BACK TO THE PLOUGH - & the meaning of 'agricultural value' within IHTA 1984 s 115(3)

On 10th October 2005 the Lands Tribunal delivered judgement in the case of Lloyds TSB Private Banking (personal representative of Rosemary Antrobus deceased) v Peter Twiddy. This, second Antrobus case should not be confused with the equally important first Antrobus case [2002] STC(SCD) 468, even though both were concerned with key definitions of inheritance agricultural property relief (“APR”).

APR provides relief against so much of a transfer of value as is attributable to the agricultural value of agricultural property (both key terms in italics being defined, respectively, in s 115(3) and s 115(2)). In order for a farmhouse to qualify for APR it must be agricultural property, which in turn, following the decision in Starke v. IRC [1995] STC 689 (CA), means that it needs to be a farmhouse ‘…of a character appropriate to the property…’. Antrobus (1) determined the tests that may legitimately be employed to determine what constitutes being of a character appropriate. The subsequent case of Rosser [2003] STC(SCD) 311 determined that the predicate of the character test of which the farmhouse was a subject was bare agricultural land or pasture held as property within the estate of the transferor. Cookhill Priory, the curious property that was the farmhouse in Antrobus (1) was judged to be agricultural property. The outstanding question was what was Cookhill Priory’s agricultural value?

The definition of agricultural value has been the subject of much debate, leading even Peter Twiddy, the Respondent in Antrobus (2) and the Assistant Director of HMRC Capital Taxes, to claim as late as October 2004 (in a conference attended by the author) that the definition may have no meaning. The agricultural value of agricultural property is held to be ‘…the value which would be the value of the property if the property were subject to a perpetual covenant prohibiting its use otherwise than as agricultural property.’ In Antrobus (2), HMRC claimed that an agricultural occupancy condition (“AOC”) imposed under planning permissions was the equivalent of this fiscal hypothesised perpetual covenant. An AOC applied to a dwelling normally limits occupation to those solely or mainly working, or last working, in the locality in agriculture or in forestry (though it will normally permit occupation by a surviving spouse or resident dependent of such a person). HMRC produced evidence of three properties where the addition of an AOC had reduced the open market value by about one-third and two cases where settlement on the agricultural value had been reached at a discount of around one-third from open market value. HMRC suggested the agricultural value of Cookhill Priory accordingly stood at a 30% discount to its (agreed) open market value. The taxpayer contended that Cookhill Priory could be occupied by anyone who farmed the surrounding land and that as such the occupier need not be wholly or mainly working, or last working, in agriculture, but might include an occupier whose main source of income lay elsewhere – what was termed in the case a ‘lifestyle buyer’ of the property.

Decision was given against the taxpayer. Although the three properties subject to AOCs were held not to be comparable to Cookhill Priory; it was also held, for reasons that are of wider importance, that a lifestyle buyer could not occupy Cookhill Priory as a farmhouse. The Tribunal, did, however, accept that one of the settled cases was a comparable property, and as that was the only evidence before it, it formed the view that HMRC’s contention for a 30% discount was not too low.

The case contains interesting observations on why the Tribunal thought an AOC was less onerous than the hypothesised perpetual covenant, which will no doubt keep valuers entertained for many years. However, for the tax practitioner the interest of Antrobus (2) lies in a narrow construction of what may constitute a farmhouse. In a key finding, the Tribunal suggested that a farmhouse was not only the place in which a farmer lives in order to farm the land but that the farmer who occupies the farmhouse lives there to farm the land “…on a day to day basis.”. A recent Taxation article by Julie Butler detailed the main fiscal consequences that arise from the introduction of the single farm payment entitlements, one of which has been that HMRC consider a recipient of the new payments who complies with keeping the land in good agricultural and environmental condition, without necessarily being in production, will nevertheless receive the payment as farming income (provide no non-agricultural activities are performed to any significant extent on the land). Furthermore, it was also confirmed in the June 2005 special edition of HMRC’s Bulletin that the land upon which those cross-compliance conditions are performed would be agricultural property for APR purposes. It is difficult, if not impossible, to additionally surmise that such a designated fiscal farmer will also be occupying the chief dwelling on the farm, from which those activities are managed in order to farm the land on a day to day basis. At a stroke, it would appear, most houses that are the management centres of fiscal farming operations cease to be farmhouses for the purposes of APR notwithstanding whether they be or not be of a character appropriate to the farm.

In support of the contention that a farmhouse must be occupied by a “handson” farmer, the Tribunal gave three reasons. The first was concerned with the development of statute leading to the modern form of APR. The Tribunal was particularly engaged with the removal of a reference to mansion houses within APR’s previously forms (going back to that provided under Estate Duty in 1894). It was suggested that the deletion of references to mansion houses indicated an objective to confine APR to the “operational components of agricultural units”. Yet this objective was not previously recognised by HMRC who had noted in the now deleted Practice Note 10 that ‘…a mansion house may qualify as the “farmhouse” provided it is in the nature of a “farmhouse”, ie, it is the dwelling from which the agricultural operations is run.” Had the objective been to curtail relief to houses occupied by “hands-on” farmers, would HMRC not have noted the fact? Furthermore, the legislation has shifted relief for agricultural property away from agricultural operations since FA 1975. Thus, whereas FA 1975 based relief upon a multiple of rental value (emphasising the possible use of the land), this approach was discarded by FA 1976, which based relief on market value of the property. Subsequently, the need for the transferor to be mainly engaged in agriculture was abandoned by FA 1981 and replaced by a requirement that the property being transferred be occupied (not necessarily by the transferor) for the purposes of agriculture (IHTA 1984,s 117). The shift back of basing the relief on the type of property rather than the type of transferor was complete when, in FA 1984, the amended FA 1975 relief was incorporated into the current relief to allow the higher rate of relief to apply to certain let property (IHTA 1984,s 116(2)(b)). This shift of basing relief on the type of property was in part done to remove a disincentive to letting agricultural land (and thereby encourage new entrants into farming). That process was continued and reached its culmination in FA 1995, which provided the same rate of relief for agricultural property whether let or not (IHTA 1984,s 116(2)(c)). Are not these subsequent changes in legislation equal to the importance of the deletion of the reference to mansion houses?

The second reason referred to the ‘commensurateness’ between the land as agricultural land and on the other the house. As earlier as the Starke case referred to above, Lord Justice Morritt has referred to the character test having a nexus between its subject and its predicate. The later case of Rosser (also referred to above) and the very recent case of Williams [2005] SCD 3021 (not yet reported within STC(SCD)) have both confirmed that the nexus betwixt farmhouse and land has nothing to do with occupation and all to do with both being property within the estate of the transferor. As both these cases are direct rulings on the meaning of IHTA 1984 s 115(2) they should, perhaps, be preferred to Antrobus (2), where s 115(2) was not the direct subject matter of the appeal.

The third reason given concerned the two other types of property subject to the character test within the definition of agricultural property, cottages and farm buildings. The Tribunal stressed that the references to cottages had to be farm cottages and that farm buildings had to be to buildings principally used for agricultural purposes. In consequence the farmhouses with which these two types of properties were combined in the definition had equally to be in use on a day to day basis, and as a dwelling that meant by a “hands on” farmer. In so reasoning, this author respectively believes the Tribunal has erred. The restriction placed upon cottages and farm buildings to arrive at the meaning of those types of property that the Tribunal suggested is derived from the occupation condition within s 117. Unless either a cottage or a farm building is occupied for the purposes of agriculture it cannot qualify for APR as s 117 would prevent relief. The statute’s reference to the purpose of occupation means that regard has to go beyond the mere use to which the property is put.

It remains to be seen whether the findings in Antrobus (2) on the meaning of a “farmhouse” for APR purposes stands closer scrutiny.

Finally, although some of us may have the unrealistic hope that farming will return to the days of the horse-drawn plough, perhaps with idyllic images conjured up by Constable and others, the whole emphasis upon farmers to-day is to spend more time managing the land rather than in traditional tillage of it. Perhaps this raises the additional question that the Lands Tribunal in Antrobus (2) left unanswered: what is modern day to day farming? It may just be that the lifestyle buyer is more able to deliver what farming has become, and through his own resources rather than by single farm payments!