Many farmers working until death due to tax anomaly

Publications that covered this story include The Telegraph, 9 July 2012.

  • Farmers risk losing significant tax relief on farmhouses if they retire or wind down farming activity

Many elderly farmers are being forced to work through their retirement, or run the risk of their estates facing huge inheritance tax bills on their farmhouses.

Farmhouses attract a relief from inheritance tax called Agricultural Property Relief (APR) if they are used in the business of running the farm, but our findings explain this relief is increasingly being challenged by HMRC if the farmer stops working before their death, or even reduces their workload .

The problem arises because:

  • as they get older, farmers tend to withdraw from the day-to-day running of the farm
  • they continue to occupy the farmhouse, which can often be one of the most valuable individual assets of the farm
  • when they die, HMRC challenges the application of Agricultural Property Relief (APR) to the farmhouse by claiming that it was no longer the centre of operations of the farm business
  • if HMRC succeeds, inheritance tax is levied on the farmhouse even though the farmer and their successor considered the farmhouse to be a business asset

Graham Boar, Director at our Letchworth office, says: “Farmers across the UK are finding inheritance planning extremely difficult to manage because of HMRC’s increasingly aggressive challenges to APR on farmhouses.”

“Many farmers don’t realise that if they ease off from running the farm as they get older they can leave the farm with a large, unexpected inheritance tax liability once they die.”

“Farmers that do know the risks are under a lot of pressure to work right through to their death to ensure that their estate doesn’t face a challenge from the taxman.”

There is evidence that these unclear APR rules unfairly penalise elderly farmers.

Graham says: “A recent Upper tier tax tribunal case*in which ill health forced an elderly farmer to live in a care home for the last years of his life, illustrates all too clearly HMRC’s stance in this area. The tribunal agreed that HMRC had demonstrated that the owner of the farmhouse was not occupying the farmhouse for agricultural purposes at the date of death, and thus denied APR on the property. This despite the decades of occupation and work the deceased had spent on the farm.”

Farmers are being challenged more frequently on APR claims, as HMRC seeks to increase its tax yield as part of ongoing efforts to plug the national deficit.

Graham adds: “Each time HMRC challenges an APR claim, it muddies the water for other farmers who plan to make their own claims. Over the last 15 years there have been so many disputes with HMRC about APR and farmhouses that even expert tax advisers are unable to be certain about whether an estate will face a challenge.”

“Farmers who should now be enjoying a hard-earned retirement are instead working themselves to death for fear of costing their successors hundreds of thousands of pounds in unnecessary taxation.”

Forward planning key to successful succession of farm’s assets

Through careful planning elderly farmers can retire without creating a large tax liability for their successor.

Graham explains: “The majority of farms in the UK operate as family businesses, often with partnership structures in place.  One solution for farmers is to transfer ownership of the farm to their children during their lifetimes. If handled correctly, this can ensure qualification for APR, whilst deferring any potential capital gains liabilities incurred at the handover pending any future sale to a third party.”

Call for reform of Agricultural Property Relief

An application for APR on a farmhouse hinges on passing HMRC’s ‘character appropriate test’ – a subjective test, not defined in statute, and interpreted differently in various test cases, such as the 5 point process outlined in 2002**. UHY Hacker Young says that HMRC has created confusion by applying its criteria more stringently in recent times.

Graham says: “There are numerous ways in which a property can fail the character appropriate test. If HMRC deems that the farmland is too small in relation to the house, or if the owner of the property is not directly enough involved in farming activity, this may be enough for the farm to lose its tax relief.  The circumstances of a lifetime are ignored whilst the final few years are scrutinised. There is far too much uncertainty.”

Graham adds: “We think it’s time that the Government looked at this area and provided some much needed clarity of when a farmhouse will or will not qualify for APR. British farmers have lost trust in the current system – they feel that HMRC’s challenges to APR claims amount to ‘moving the goalposts’. A clearer system would benefit the UK farming community as a whole, and ensure that family farms continue to be passed down through generations.”

* Hanson (2012) TC01791

**Antrobus (2002) STC(SCD) 468