This part of Section 9 deals with relief for agricultural property under two headings:
1. Provisions for relief. (Paras 9.63 - 9.73).
2. Procedure. (Paras 9.74 - 9.84).
Practice Note 10 (PN 10) provides a detailed review of how property may qualify for Agricultural Relief together with advice on the assessment of agricultural value.
9.61 Statutory references
All statutory references are to the Inheritance Tax Act 1984 unless otherwise stated.
HMRC have the ultimate responsibility for deciding the extent of the estate and whether or not a particular estate satisfies the requirements for relief. The role of the VOA is to provide informed professional advice on what qualifies as "agricultural property" and any consequential valuations and, if so requested, to negotiate with the taxpayers in specific cases.
The statutory provisions for relief are contained within ss115 - 124 IHTA 1984, as amended and extended by FA's 1986, 1987, (No 2) 1992, 1995, and 1996. Additional relief is also provided in certain Extra-Statutory Concessions (ESC) published on 13 February 1995.
The relevant texts of these provisions are reproduced in PN 10.
9.64 Transfers to which the relief may apply
The relief is available for lifetime transfers and on death, and also for settled property whether there is an interest in possession or not. It also extends to certain transfers of shares in companies which own or occupy farms. By the FA 2009, agricultural relief was extended to transfers of property in the European Economic Area.
9.65 Identification of the Property
Identification of "the property" is a matter for HMRC. Occasionally HMRC will ask for assistance in identification and guidance on this identification is included in PN 10, Part 1.
Where there is doubt about the extent of the property, whether arising from preliminary consideration of the case, raised by the parties or following an inspection, full details should be submitted to HMRC and their instructions sought before proceeding further. This procedure should also be followed where the case worker discovers property which is part of the estate but the existence of which HMRC were previously unaware.
If it is possible to continue with other aspects of the case this should be done ensuring that no opinion about the extent of the estate is expressed to the parties but, if it is not possible to continue, the case should be cancelled and the matter referred back to HMRC with a full explanation of the points of concern.
9.66 Necessary conditions to be satisfied for property to qualify for relief -
These aspects are considered and determined by HMRC. This relief is available where:-
- the agricultural property was occupied by the transferor for the purposes of agriculture throughout the period of two years ending with the date of the transfer (s117(a)); or
- it was owned by him throughout the period of seven years ending with that date and was throughout that period occupied (by him or another) for the purposes of agriculture (s117(b)).
S124A provides additional conditions where a charge or increased charge arises by reason of the transferor's death within 7 years of a lifetime transfer. In these cases relief is preserved only if the following conditions are satisfied:
i. that the original property was owned by the transferee throughout the period between the gift and the death of the transferor and was not subject to a binding contract for sale; and
ii. that the property qualified for relief at the date of gift (or, in the case of Potentially Exempt Transfers (PET), would have qualified for relief if chargeable when made); and
iii. that the property was agricultural property immediately before the death of the transferor and was occupied for agricultural purposes throughout the period in i. above.
In the case of lifetime transfers the conditions for Agricultural Relief will be judged both at the date of gift and again on the occasion of the death of the transferor within 7 years when additional tax may be payable. In the rare case where the transferee pre-deceases the transferor the conditions are tested at the death of the former.
S124B deals with the situation where agricultural property subject to a PET is sold and replaced by other property prior to death. The provisions are complicated and HMRC will give full valuation instructions in appropriate cases.
By Extra-Statutory Concession (ESC) F16 dated 13 February 1995 the Inland Revenue announced that:-
"On a transfer of agricultural property which includes a cottage occupied by a retired farm employee or his/her widow(er), the condition in ss117 and 169 concerning occupation for agricultural purposes is regarded as satisfied with respect to the cottage if either:-
- the occupier is a statutorily protected tenant, or
- the occupation is under a lease granted to the farm employee for his/her life and that of any surviving spouse as part of the employee's contract of employment by the landlord for agricultural purposes."
This ESC has effect for all chargeable transfers for which tax liability had not been agreed by 13 February 1995. (See PN 10.)
Further background details of the provisions for Agricultural Relief may be found on the HMRC website at www.hmrc.gov.uk/manuals/ihtmanual, but any queries made by the parties on the application of the provisions must be referred to HMRC.
9.67 Replacement property
Complicated rules apply where the transferee has sold the original property and used the proceeds to buy other property which would qualify on death of the transferor for Agricultural Relief (s124B IHTA 1984 inserted by para 22 Sch 19 FA 1986). In these circumstances relief is not necessarily lost and HMRC may request advice on whether the replacement property qualifies as agricultural property.
9.68 The Relief
The relief for agricultural property applies only to its agricultural value, which is defined as the value of the property if the property were subject to a perpetual covenant prohibiting its use otherwise than as agricultural property (s115(3)). Different rates may apply depending upon whether the agricultural property has the benefit of vacant possession or is tenanted.
The appropriate levels of relief are set out in tabular form in PN 10, Part 3.
9.69 Interaction with Business Relief
Where the conditions for both Agricultural and Business Reliefs are satisfied only Agricultural Relief is given in respect of the agricultural value. Business Relief may be available for any additional value. For example, land with hope value or amenity value in excess of the agricultural value may attract Business Relief on that excess value.
A farmhouse that fails to qualify as "agricultural property" by not being "of a character appropriate to the property" normally will not attract Business Relief because it is not occupied primarily for the purpose of the business. However, any part of the farmhouse that was used exclusively for the purpose of the business of agriculture, or any business, may qualify in certain circumstances for Business Relief but this is a matter for HMRC to decide. The extent of the accommodation within a farmhouse that is used exclusively for the purposes of business is a question of fact and, therefore, is a matter upon which the caseworker can advise HMRC.
Caseworkers must not engage in discussions with the parties on the availability of Business Relief, unless specifically instructed to do so by HMRC, but should refer them to HMRC. (See Section 11 and, in particular, para 11.53.)
Where the caseworker suspects that Business Relief may be applicable, full details should be submitted to HMRC and their instructions sought before proceeding further. The details provided should include identifying the business property and by whom it was used and indicate why the open market value may exceed the agricultural value. Following consideration of the matter, HMRC will instruct the caseworker on what further action should be taken.
9.70 Undivided shares and Agricultural Relief
Undivided shares in property generally arise where two or more persons have a beneficial interest in the entirety of a particular interest in land (ie. an equitable tenancy in common), each being entitled to a separate share, usually held under a trust of land with the legal estate being vested in the trustees. (See Section 18 and PN 2.) In practice, this means that the owner of an undivided share has part ownership in all the property; not an exclusive ownership in a specific geographical part of the property.
When considering whether a particular cottage, set of farm buildings or a farmhouse is "of a character appropriate to the property”, the fact that the subject dwelling or building is held in undivided beneficial shares is irrelevant. The division of shares should be ignored when deciding whether or not the farmhouse etc, is of a character appropriate to the entire holding.
However, if the agricultural land to which that farmhouse etc is claimed to be of a character appropriate is held on an undivided beneficial share basis that fact is of relevance. Agricultural land in which the deceased had an undivided share interest can only be exploited with the cooperation of the other third party share owner. If that other share owner has no interest in the subject house, then less weight should be attributed to that land in supporting the claim of the house being of a character appropriate.
9.71 Undivided shares and agricultural value
The agricultural value may be required of an undivided share, or the aggregate of a number of such shares if the agricultural property is an underlying asset of a partnership. The usual considerations in valuing undivided shares (see Section 18) and partnership assets (see Section 19) will apply.
9.72 Value transferred on lifetime transfer
There can be situations where the value transferred on a lifetime transfer exceeds the value of the property transferred because of the "loss to the estate" concept (see Section 4 paras 4.9 and 4.15 et seq.) In such an instance Agricultural Relief will normally be allowed on the value transferred provided that the general conditions for relief are met. (See para 9.66 above.)
In assessing the agricultural value in such cases regard must be had not only to the interest transferred but also to that retained by the transferor which was reduced in value by the transfer. Any cases where the market value of the interest retained by the transferor exceeds its agricultural value should be referred to SVT Policy and Professional for further advice. This will apply in respect of both immediately chargeable lifetime transfers and Potentially Exempt Transfers which fail because of the death of the transferor within 7 years.
If a case arises in which a lifetime transfer of agricultural property reduces the value of retained property which does not qualify as agricultural property, it should be referred to the CEO Technical Centre for further advice.
9.73 Partnership property assets
Where agricultural property comprises a partnership asset and Agricultural Relief is applicable, the entirety value of the partnership property should be reported, indicating the agricultural value of the aggregate of the individual shares held by the partners.
9.74 Reference of cases
References from HMRC will be made in electronic format via the Nottingham Initial Appraisal Unit. All formal and second-stage scrutiny cases are to be undertaken entirely within EDRM.
The reference will comprise a valuation instruction sheet together with any further documents and emails required. The following matters may be referred to:
- A statement that the provisions of Section 117 appear to be satisfied (see para 9.75).
- A request for information where there is doubt as to the application of Section 117 (see para 9.76).
- A request to ascertain whether all parts of all items satisfy Section 115(2) (see para 9.77).
- An indication of the items upon which Agricultural Relief is potentially due (see paras 9.82 & 9.83).
- Any further information that may be relevant to the consideration of the particular case.
Cases involving Agricultural Relief can be complex and, should the case worker feel that the instructions received are deficient, HMRC should be requested to clarify them before the valuation proceeds. In the event of difficulty in this aspect, caseworkers should contact SVT Policy and Professional for assistance.
9.75 Occupation for the purposes of Agriculture - Section 117
It is the sole responsibility of HMRC to decide whether or not Section 117 is satisfied.
A statement that the provisions of Section 117 appear to be satisfied is only an indication that HMRC is, prima facie, satisfied that there was an occupation for the purposes of agriculture. It does NOT mean that HMRC considers that Section 115(2) has been satisfied.
It should be borne in mind that HMRC do not normally notify the parties that they accept, prima facie, Section 117 is satisfied before they refer the case to the VOA. Therefore, if later evidence emerges that suggests Section 117 is not satisfied, HMRC could deny the relief. Caseworkers must avoid giving the impression that Agricultural Relief will be granted. Discussions with the parties as to whether or not the property was occupied for the purposes of agriculture or whether Agricultural Relief will be available should be avoided.
Care must be taken to ensure that there is no unintentional prejudice of HMRC's position as a consequence of negotiations and any exchanges of correspondence.
9.76 Doubts on the application of Section 117
- When considering whether s117 has been satisfied HMRC may seek confirmation of the facts regarding occupation for the purposes of agriculture from the caseworker and/or a request that s115(2) be considered before they come to a decision.
- The caseworker, from inspection, local knowledge, or a claim by the parties, may have doubts as to whether or not part, or the whole, of the property was occupied for the purposes of agriculture. In such cases HMRC should be informed immediately. The case should remain open pending receipt of advice but no further contact should be made with the parties.
9.77 Identification of Agricultural Property - Section 115(2)
Full advice on the application of these provisions is contained within Practice Note 10.
In correspondence with the taxpayers, when considering whether a particular cottage, set of farm buildings or farmhouse is "of a character appropriate to the property", the caseworker should specify the extent of the land within the transferor/deceased's estate to which regard is being had. The extent of the land will be limited to that land where there is a unity or identity of occupation between it and the dwellings and/or farm buildings.
As soon as it becomes apparent that there is no consensus as to the extent of the property within the estate to which one may have regard for character appropriate purposes, the caseworker should inform HMRC and ask for further instructions.
If, having established the extent of the "agricultural property"( ie. the "agricultural land or pasture"), the caseworker considers that the particular cottages, farm buildings and farmhouse on which relief have been claimed are not of a character appropriate to that property, HMRC should be advised, by means of an Initial Agricultural Relief Report (see para.9.78 below).
9.78 Initial Agricultural Relief Report
On receipt of a reference from HMRC which indicates that a claim for Agricultural Relief has been made, caseworkers should inspect the property and then consider the question of which land and buildings, if any, qualify as 'agricultural property'.
If, following inspection and making any necessary enquiries, the caseworker is satisfied that all the land and buildings in respect of which Agricultural Relief has been claimed prima facie qualify as 'agricultural property' then the case should be progressed in accordance with the normal case procedures.
If, following inspection and making any necessary enquiries, the caseworker considers that any of the land and buildings in respect of which Agricultural Relief is claimed do not qualify as 'agricultural property' then an 'Initial Agricultural Relief Report' report should be sent to the HMRC . The Initial Agricultural Relief Report should contain the information listed in the standard report proforma available on EDRM (Template IHT 46). At this point there should be no further contact with the parties until further instructions are received from HMRC. However, if the case includes other properties in respect of which Agricultural Relief is not being claimed then the caseworker should proceed with the valuations of those properties in accordance with normal procedures.
Caseworkers should aim to issue the Initial Agricultural Relief Report to HMRC within 8 weeks of receipt of the case.
If caseworkers require assistance with the question of which land and buildings qualify as 'agricultural property' under S115(2), they should contact SVT Policy & Professional.
9.79 Contact with the parties
Before referring the case to the VOA, HMRC will advise the parties that they are seeking a report from the VOA and that the VOA caseworker may contact them to arrange an inspection. When contacting the parties to arrange an inspection, or during the inspection itself, caseworkers should not enter into any discussions on the question of whether all or any part of the property qualifies for Agricultural Relief. If asked, caseworkers should explain that at this stage they have been requested to provide an initial report on which land and buildings qualify as 'agricultural property' and that HMRC will be in touch in due course after considering the report.
If further information is required before the caseworker can complete the Initial Agricultural Relief Report then this should be sought from the parties. The usual procedures regarding requests for further information, as set out in the IHT Manual, paragraphs 27.21 - 27.22, should be followed.
9.80 Action by HMRC on receipt of the Initial AR Report
On receipt of the Initial Agricultural Relief Report the HMRC caseworker will refer the case to their Technical Group (TG), who will review the case and decide whether or not they wish to dispute the claim for Agricultural Relief.
If HMRC decide that they do not wish to dispute the claim for Agricultural Relief (and that is the only matter on which they need advice from the VOA) then they will settle the case on tax grounds, without prejudice to the question of whether any dwellings or other buildings qualify as agricultural property. HMRC will then advise the VOA caseworker that no further action is required and the case may be treated as reported.
If HMRC decide that they do wish to dispute the claim for Agricultural Relief (or, although they decide that they do not wish to dispute the Agricultural Relief claim, there are other valuations or apportionments on which they need advice) they will issue further instructions to the VOA setting out exactly what they require. This will include, where relevant, HMRC asking the VOA caseworker to put their opinion to the parties.
If the parties are unwilling to accept the VOA’s opinion HMRC will normally request the caseworker to provide a Defendable on Appeal (DOA) report on the question of whether the dwelling or other buildings qualify as agricultural property. Should HMRC request a DOA report, the caseworker should proceed in accordance with Section 27, paragraphs 27.47- 27.48.
If an Initial Agricultural Relief Report has been sent to HMRC and nothing further has been heard from them within 3 months of the report being dispatched, the case can be closed, providing the only issue preventing conclusion of the case is the question of the extent of the qualifying agricultural property (i.e. the caseworker has agreed the valuations of any other properties in the estate). The caseworker should notify HMRC using the standard letter available on EDRM (Template IHT 47).
9.81 100% relief cases where Section 115(3) does not apply
HMRC will require values to be reported only when IHT is going to be charged. Where there is qualifying "agricultural property" entitled to 100% relief and there is no difference between the agricultural value and the open market value, the caseworker should not become involved in negotiations over the values or report values of qualifying agricultural property to HMRC.
If it is necessary to notify the parties of opinions of value for any other properties in the estate it is not appropriate to put opinions of value to the parties in respect of those properties where IHT is not likely to be payable. In any reference to such property it should be stated that Agricultural Relief at 100% has been claimed by the parties and the caseworker should simply express the opinion that the agricultural value is equal to the open market value.
9.82 Less than 100% relief cases where Section 115(3) does not apply
Where the level of relief is less than 100%, the value transferred and the agricultural value of the qualifying "agricultural property" must be reported. The value transferred should be determined as if agricultural relief did not apply.
9.83 Exclusion of value arising from any non-agricultural uses - Section 115(3)
Where qualifying "agricultural property" has an open market value in excess of its agricultural value under s115(3), for instance, the whole or part of it may have hope value arising out of development potential or change of use, that excess value will not attract Agricultural Relief. (See PN 10, Part 2.) However, that excess value may possibly attract Business Relief and, in these circumstances, reference should be made to para 9.69 above, as agreement of values may not be necessary.
9.84 No prior agreement
The VOA is not authorised to prior agree the values of items of "agricultural property" where the parties indicate an intention to claim relief.