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Practice Note 2: Appendix 2 - The Valuation of Farms for Council Tax

1.0 Introduction

This Practice Note considers situations where domestic property occupied with agricultural land is to be treated as a composite hereditament and how the valuation of this composite dwelling is to be approached. It also covers the valuation of non- composite dwellings which are subject to agricultural planning restrictions.

2.0 Extent to which a Farm is a Composite Hereditament

2.1 Establishing whether composite

Section 3(3) of the Local Government Act 1992 provides that:

"A hereditament which,

(a) is a composite hereditament for the purposes of Part III of the 1988 Act (LGFA); and

(b) would still be such a hereditament if paragraphs (b) to (d) of section 66(1) of that Act [domestic property] were omitted, is also, subject to subsection (6) below ["Aggregation"/"Disaggregation"], a dwelling for the purposes of this Part."

In order to determine whether a farm is a composite hereditament, and therefore a dwelling, it is necessary to establish the extent of the hereditament.

The majority of farms comprise a main holding which includes a farmhouse with adjoining land and buildings all of which are occupied by one person i.e. the farmer. In such cases the farmhouse and the land and buildings will together usually form the hereditament. In such circumstances the farm is a composite hereditament, as it comprises both domestic (i.e. farmhouse) and non-domestic property (land and buildings).

It is vital to establish whether the dwelling actually composite. The occupier of the house must be the occupier of the land. Common pitfalls which may be found:-

● Land actually farmed by another. Where occupation of the land is by another party, (not merely use of contractors) or where the land has been let out or sold off, then the house will not be composite.

● Retired occupier, no longer a working farmer. The farmhouse may be occupied by the retired farmer no longer connected with farming the land.

● A retired farmer must be still be part of or have a share in a controlling farming company that owns the whole hereditament and works the land before conceding composite.

● Farm workers job contract may not tie house with job.

● Farm cottage let to another occupier, unconnected with farm.

● Houses on farm in separate ownership/occupation from the land.

2.2 Information required

In order to establish whether a composite exists, and the nature of the occupation the following information should be requested from agents acting following a proposal or enquiry, if that information is not already available.

● A copy of the valuation

● The comparable evidence to support request for a review

● A plan showing the boundaries of the farm and the farmhouse

● Confirmation of whether any alterations or extensions have been made to the property since 1 April 1993 (full details, including dates, where alterations or extensions have been carried out)

● Confirmation of who are the legal owner and occupier of the farm and house i.e. if there is a farm company established for the occupation/ownership of the agricultural land and buildings, or if the house has been gifted to or occupied by another family member, etc.

● Confirmation of the exact nature of the duties that the occupier of the dwelling has in farming the land.

● Confirmation of whether the occupier of the dwelling is bound by employment contract to live in that particular dwelling.

● Confirmation as to whether any parts of the farm have been sold or let out since 1 April 1993

A skeleton enquiry letter has been prepared.

2.3 Houses and Cottages situated within the Main Holding

Agricultural Workers Cottages

Some farms include houses or cottages which are "occupied" by farm workers and form part of the main holding. The question to be answered is, are they actually part of a larger composite? Whether these properties form part of the main composite hereditament (e.g. farmhouse and land) depends on who would have been considered to have been in rateable occupation of the property had the 1973 List remained in force. Accordingly it is necessary to look at the nature of the occupation which exists.

Nature of Occupation

1) If it is essential to the performance of the duties of the farm worker that the farm worker should occupy the house; or

2) Whilst it is not essential for the farm worker to occupy a particular house, if the farm

worker can better perform his/her duties as a servant to a material degree by occupying the house, and it is part of his/her contract of employment (e.g. a cottage occupied by a herdsman who is obliged, by his contract of employment, to live there in order to be in close proximity to the herd at all times), then the employing farmer is in 'rateable occupation', the farm worker is in the nature of a ‘servant’ of his employer, and the subject domestic property will form part of the composite hereditament.

Cases of doubt should be referred to Technical Advisers for specific guidance as necessary.

Temporarily Vacant Cottages

Where an agricultural worker's cottage, which forms part of the farm hereditament, becomes vacant and it appears likely that the next occupant of the house will also be required to live in that house for the better performance of the worker's duties, then the house should be regarded as remaining part of the farm hereditament during the period of vacancy.

2.4 Property Occupied by a Farming Partnership

Farming partners (e.g. father and son) who occupy domestic properties held under a partnership agreement will usually be joint rateable occupiers and both properties will form part of the larger composite hereditament. Where a member of the family occupies a domestic property but is not a partner the tests of occupation described at 2.2.2 above will apply.

Land Situated away from Main Holding

‘Farms’ may comprise a number of parcels of land which whilst farmed as one unit are in fact severed from each other not just by roads but sometimes by a distance of miles.

The practice of treating farms divided by roads as one hereditament prior to agricultural de-rating was one of the examples quoted by Lord Denning when establishing the functionally essential test in Gilbert v Hickinbottom 1955. He stated:

"There are exceptional cases where two properties, separated by a road, may be treated as one single hereditament for rating purposes." And,

"In such cases the two properties on either side of the road are so essentially one whole - by which I mean, so essential in use the one to another - that they should be regarded as one single hereditament."

It is not considered likely that parcels of land separated by more than the width of a road will be so essential in use "the one to another" that they will form part of the same hereditament but a situation could arise when all the principal from buildings are located on the opposite side of a public road away from the main area of land. In these circumstances it may be difficult to argue that there is not a functionally essential link between the two parts. In cases of doubt, as in the case of farm workers cottages and where treating separated land as a single hereditament together with the main holding would affect the band to be ascribed, details should be referred to Technical Advisers for specific guidance.

Houses and Cottages Situated away from Main Holding

When considering whether a house separated from the main holding forms part of the composite hereditament the first question to be addressed is: Who would have been regarded as in rateable occupation had the 1973 list remained in force? This involves applying the tests detailed in 2.2.2 above. If any person other than the occupier of the main holding (ie. the farmer) would have been in occupation there will be no need to consider whether the cottage is functionally essential to the holding as it will form a separate hereditament by virtue of its occupation.

If it is decided that the farmer would have been the rateable occupier then the test of functionally essential needs to be applied to determine whether it is part of the farm or a separate hereditament (albeit in the farmer's rateable occupation). It will sometimes be the case that a farm cottage occupied by an employee but which would have been in the rateable occupation of the farmer for the purposes of the 1973 List and situated on the other side of the road from the farm should be treated as part of the composite hereditament.

A farmhouse separated from the farm land and buildings by more than the width of a road may constitute a hereditament in its own right, irrespective of who would have been in rateable occupation.

3.0 Valuation

3.1 Relevant Amount: Sale of the Whole Farm to be Assumed

A sale has to be assumed of the composite hereditament as one unit. Regard must not be had to the price which would be achieved if the farm was divided into more profitable lots as this would offend the concept of "the hereditament".

The fact that a sale of the whole farm is required to be assumed, will not preclude bids from the non-farming sources, but it is to be assumed that the dwelling had no development value other than value attributed to "permitted development" (Reg 6(2)(h)). Any additional value attaching to any land or buildings because of their development potential therefore must be ignored.

It is to be noted that there is no specific requirement in Reg 7 to carry out an actual valuation of the composite hereditament (ie. the whole farm) to determine the relevant amount. What is required is merely "that portion of the relevant amount which can reasonably be attributed to domestic use". However, whilst it is not considered necessary for Listing Officers to carry out specific valuations it will sometimes be necessary to state a range of values within which it is believed the value of the farm falls e.g. between £800,000 and £1m. This will enable all parties to discuss the nature of the demand for the whole and estimate the value which should be attributed to domestic use. This approach was endorsed by the Court of Appeal in Atkinson and others v Lord (LO)1997 RA 413 referred to in paragraph 6 of the Practice Note.

3.2 Valuing the Domestic Use – General

It is not possible to arrive at "that portion of the relevant amount which can reasonably be attributed to domestic use" of the farm directly from market evidence, because separate sale prices of former farm dwellings will not reflect composite status. Clearly there can be no direct comparable evidence of domestic property which is sold as part of a farm. Whilst there is sales evidence of "farmhouses" sold in "isolation" (i.e. without any non-domestic property) it is essential that this evidence is adjusted where appropriate to reflect the fact that the domestic property (use) being valued forms part of a larger hereditament, ie the farm.

Two approaches

The guidance below sets out two possible approaches to valuation apportionment - the application of discounts from non composite evidence, and a full mathematical apportionment approach.

3.3 sets outlines a simplified approach, to arrive at an apportioned band value based on discounting from non composite evidence. A simplified approach has been approved in the courts as a valid method, (see PN 2 for detail of Atkinson v Lord case) and is recommended for caseworkers to adopt.

3.4 sets out a mathematical apportionment method of valuation. It may well be, however, that insufficient information on land values is available to successfully carry out such a detailed valuation, thus para 3.3 would be the usual approach, which has been accepted and approved by Valuation Tribunals.

3.5 and 3.6 sets out the separate consideration of planning restrictions involving discount judgements to non-composite agricultural dwellings.

3.3 Valuation by reference to adjusted sale prices - applying discount factors

The cases of Atkinson and Lord confirmed that it was not necessary for a LO to carryout a detailed valuation of the relevant amount such as in 3.6 below. It is sufficient that an opinion of value be arrived at by applying an appropriate discount to reflect the domestic use value apportionment. Base evidence, therefore to be adjusted, may form sale prices of similar non-composite dwellings in a locality, and realistic discounts should be applied to take account of the various factors to be reflected.

As a general rule the larger the farm unit in terms of acreage, the larger the adjustment factor. In the early years of the Lists general agreement was reached as to the simplified approach of adopting discount factors from non composite evidence, according to regional evidence and practice.

Whilst at larger acreages basic discounts may typically reach 15%, small units of a few acres may not qualify for any discount at all, it being likely that purchasers in the market (where no specific agricultural planning restriction applies) may even cause a premium demand, over and above standard dwellings. LOs should build up evidence discount necessary.

The important thing is to be able to demonstrate that the legislative requirement to apportion domestic use value out of something larger has been undertaken, which properly reflects a restricted value, where appropriate.

Method summary:

● Determine the extent to which the farm is a composite identifying the dwelling(s) to be apportioned

● Select sales evidence from the locality of similar age size and character as possible. Former farmhouses would be ideal.

● Apply a percentage deduction according to the acreage of the composite land holding. This is to reflect an average value reduction for the domestic element based on size of the holding.( See notes below)

● Nuisance factors: Consider the proximity of buildings which would detract from the domestic use amenity, and make a further adjustment if applicable. This takes account of case specific disabilities. Though by nature the living accommodation serves a farm, close proximity to pig sheds or slurry pits, for example, will not enhance the domestic use value. However, this could be offset by the convenience of location of the living accommodation to other essential amenities on the farm. Proximity of general barns and buildings may be an advantage for the working farmer.

Note 1. In applying this method there will be minor regional variations to reflect local market conditions and practice as at AVD.

Note 2. Milk quotas: In dairy farms where values may have been affected by milk quotas at AVD, the existence of a quota should be reflected, if it affected market value of the ’relevant amount’ ie the whole composite value to be apportioned. There is nothing in the legislation that requires any particular farm quota to be adjusted. The farm value must be what a farmer would have paid for the farm unit. It follows that it is incorrect to adjust for milk quotas as a separate deduction when apportioning the value of domestic property on a dairy farm. Sale of a milk quota will also not fulfil the requirements of a relevant transaction nor will it constitute a material decrease, so will not affect banding.

3.4Full apportionment approach:

3.4.1 Farms which contain a single unit of domestic property

NB. This approach can only be used if information relating to farm values around AVD sold with and without agricultural dwellings are available and reliable.

If, having regard to market conditions at AVD, a farm would have been sold in separate parts ie lotted, great care must be taken when valuing the domestic use to avoid any over-valuation.

The lotting of a farm introduces a different market, usually one which is interested in purchasing a house and/or accommodation land as opposed to a working farm. Where the constituent parts are of such a character that their aggregated values if sold in isolation would be in excess of the figure which would be achieved as a working farm, lotting usually occurs, e.g. large character farmhouse away from farmyard; land easily served from the road by neighbouring farmers.

Because it is necessary to assume a sale of the single unit, any additional value which would be generated by lotting must be ignored. In most instances the level of values attaching to farmhouses sold in isolation will have been generated by a "non-working farm" market. Any increase in value over and above the value which a comparable farmhouse would have achieved if sold as part of a working farm must be removed before arriving at the value of the domestic use.

To ensure that an appropriate adjustment is made to the sale prices achieved by farmhouses sold in isolation, the "non-working farm" market in any given area requires to be identified. For different types and sizes of farms (and farmhouses) apportionments can be made in order to establish the extent to which the sales evidence should be analysed, e.g.

LOs may receive representations suggesting that a given farmer only requires a house or bungalow which enables him to operate his farming activities effectively. Because a substantially inferior property would achieve this end it may be suggested that when arriving at the value of the house as part of the composite the sale price achieved in isolation should be substantially discounted.

However, it is to be assumed that the farm is sold with vacant possession and that the portion of the relevant amount which is attributable to domestic use should reflect the value which the market (albeit for the whole) would place on it. Even where the market for a particular farm consists only of working farmers it is suggested that many will often be prepared to pay considerably more for a farm which, although similar in all other respects, has a farmhouse which is substantially better in terms of character/quality.

3.4.2 Farms which contain more than one self contained unit of domestic property

Where a farm contains more than one self contained unit that portion of the relevant amount which attaches to each individual unit requires to be ascertained.

When arriving at a value in respect of each of the respective units the preferred approach to be adopted is as follows:

Value of domestic parts
if sold in isolation
_______________________ x Value of farm if sold as one unit
Value of all parts in isolation

Example
House and 200 acres and 2 cottages if sold as a single unit £480,000

 

 

Value of land if sold in isolation

320,000

Value of house if sold in isolation

125,000

Value of cottage 1 if sold in isolation

55,000

Value of cottage 2 if sold in isolation

55,000

555,000

3.5 Effect of Planning Tie –non composite dwellings

This may have an effect where the planning authority have stipulated agricultural occupancy conditions. It will often occur when new dwellings have been built for sons or daughters who are employed on the farm, where development would not otherwise be allowed.

If a farm is a composite, then it will be already occupied by a working farmer. Traditional farmhouses, however, which for centuries have been at the centre of a working farm unit may well not have any specific planning ties stating that the dwelling must be occupied by an agricultural worker. In the vast majority of cases, once a composite farm dwelling has been adjusted for factors in 3.4.1 above, no further deduction for a planning tie would be applicable. Such a deduction would effectively amount to double counting. The purpose is to arrive at a value of the domestic part to reflect the composite on a working farm. Having already made deductions from market value, the reduced composite value would be the value that a working farmer would pay. It follows, therefore, that only where the composite has a small acreage which does not qualify for acreage deduction, would an additional discount for a planning restriction be warranted.

Where, however, the dwelling is not a composite, ie in separate occupation or not situated on the land, but is subject to a an agricultural planning tie, then a full deduction will need to be made to reflect the restricted market for the dwelling as at AVD.

3.6 Date of planning tie

It is necessary to establish whether such a condition existed at AVD, (or later if the dwelling was constructed post compilation date.) If a condition was attached to the property at list commencement, the extent to which this would have affected its market value at AVD should be fully reflected. The adjustments which it is appropriate to make in comparison to a similar property which has no such restriction will depend on:

(i) the nature of the restriction

(ii) the area in which the dwelling is located - the level of demand for such dwellings by working farmers.

(iii) the likelihood as at AVD, that if requested, the restriction would have been lifted by the local planning authority.

LOs should ensure that they are fully aware of the different types of planning restrictions which have been imposed by their respective planning authorities and the general policy adopted towards them.

The method of reflecting such conditions in the valuation of the dwelling has in practice been to make a reduction of 10-30% in the unrestricted vacant possession value of the dwelling, but this will be a matter of local evidence.

Where such a property is considered to form part of the larger holding it is unlikely that any further reduction will need to be made to reflect the fact that it is part of a composite although all "nuisance factors" should be considered on their own merits.

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