I have had several cases recently where the farmer has died and the widow has continued to farm using a contract farming arrangement. The recent Special Commissioner’s case (known as McKenna), has thrown greater doubt on claiming agricultural property relief on a farmhouse for inheritance tax purposes, where the farm is contract farmed. So what can be done?
On the basis of the reported facts, the McKenna case was not an ideal one to have been taken to the courts. The Special Commissioner decided that the house was not a farmhouse before considering the actual farming arrangements. But she went on to comment that, due to the nature of the contract farming arrangement, even if the house had been a farmhouse of a character appropriate to the farm, it was no longer the farmhouse from which the day-to-day activities of farm management were conducted.
The level of importance placed on the concept of day-to-day activity is what should give concern to farmers whose land is contract-farmed. Care is needed in drawing up contract-farming agreements and it should not be assumed that agricultural property relief on the farmhouse will be automatically available in these cases.
Where contract farming agreements are in place, I would recommend the farmer keeps written notes of all telephone conversations, meetings and significant decisions that are made with the contractor, the agronomist, and so on. These notes should be copied to the land agent and accountant on a regular basis, so that should the availability of tax relief be queried, then evidence of active involvement would be available.
It should be noted that for tax purposes, you are “guilty until proven innocent”, so evidence to support the farmer’s involvement must be kept. I would also suggest regular monthly meetings between the farmer and contractor, and the farmer should ensure that all invoices are made out to him, rather than the contractor.
Even if agricultural property relief is available on the farmhouse, then following the Antrobus II case in 2005, it is likely that the District Valuer will argue that some of the value of the farmhouse, representing its amenity value, would not qualify for agricultural property relief.
In the Antrobus II case, the amenity value was interpreted as 30% of the market value of the property. But this should not be taken as a fixed percentage, but more as a guide to the sort of fraction that the District Valuer might put forward.
As the availability of agricultural property relief on the farmhouse cannot be guaranteed, farmers might consider obtaining appropriate life insurance, written in trust, to assist the next generation with the payment of any inheritance tax due upon the farmer’s death.
Alternatively, farmers might consider moving to a smaller property on the farm, or sharing the farmhouse with the next generation, to reduce the value of their residence.
Finally, farmers may consider securing their debts on the farmhouse if they have no other assets that will not qualify for inheritance tax relief.
There’s no panacea to this problem. But a variety of approaches can help mitigate this latest attack on farmers.