In recent years, HMRC appear to have taken a more robust approach to reviewing APR claims for farmhouses, particularly where the dwelling is of high-value, or the farming activity is relatively modest.
Following the changes announced in the Autumn Budget 2024, individuals are entitled to 100% Inheritance Tax (IHT) relief on qualifying agricultural and business property with a combined value of up to £2.5m. Qualifying property in excess of this threshold is generally subject to IHT at an effective rate of 20%.
APR will only be available on the agricultural value of the farmhouse; this can often be lower than the full market value.
For a farmhouse to qualify for APR, the property must (1), be occupied for the purposes of agriculture for at least two years prior to the event and, (2), it must be character appropriate to the farming activities that are taking place.
- Farmhouse is not defined in legislation, but decisions laid out in tax cases set some principles to follow:
- The farmer of the land is the person who farms the land on a day-to-day basis;
- The farmhouse is the chief dwelling-house to a farm in which the farmer lives; and
- The day-to-day activities of the farm are run from the farmhouse.
- The character appropriate test is subjective and HMRC have published guidance on the main factors to consider which include:
- Whether the farmhouse is appropriate by reference to its size and layout with the farm buildings and agricultural land.
- Whether the farmhouse is situated as an integral part of the farming operation rather than being separate from it.
- Whether a reasonable and informed person would regard the property simply as a house with land, or as a farmhouse.
Whilst each case will be considered on its own facts, there are a number of practical steps that can help demonstrate that a farmhouse is occupied for the purposes of agriculture. Examples include:
- Holding regular farm management meetings at the farmhouse and retaining clear meeting minutes evidencing the location. This should include meetings with external advisers such as land agents, agronomists, and other professionals.
- Maintaining a dedicated farm office within the farmhouse from which the administrative and management functions of the farming business are carried out. Where a farm office is operational photographic evidence will help substantiate a claim.
- Ensuring the farmhouse is used as the principal correspondence address for the farming business, including HMRC and other regulatory bodies.
- Keeping farm business records at the farmhouse including livestock records, cropping plans, invoices, and other management documentation.
- Where contractors undertake farming operations, retaining evidence that the occupier remains responsible for key management and husbandry decisions, and actively supervises the farming activities.
In summary, taking simple steps such as those outlined above can strengthen a claim for APR on a farmhouse and potentially result in a significant IHT saving.
As HMRC will consider the circumstances existing in the two years prior to the event, it is important, to regularly review what is happening on the ground, and to ensure the farmhouse continues to be central to the farming activities.
Please contact us if you would like to discuss any issues in this article.
