Whilst Inheritance Tax counts for less than 1% of the Government’s tax income, it is also one of the most contested taxes due to the reliefs that are currently available. Of those reliefs, Agricultural Property Relief is probably the most contentious, as investors have increasingly sought safe haven in agricultural land and property contributing to strong agricultural land values. Most of us will have heard of the large tracts of Lincolnshire bought by the Dyson family in recent years (other vacuum cleaners are available!).
In our experience HM Revenue & Customs (HMRC) are now routinely challenging the majority of applications for Agricultural Property Relief. However, due to lack of resources both at HMRC and the Valuation Office Agency we are experiencing a significant backlog in assessment of Inheritance Tax property values of circa two years from the date of death; in addition novel areas of challenge by HMRC are being seen on a regular basis.
We have recently been involved with a case where HMRC argued that unless a farmer can demonstrate that crops end up in the human food chain then the use of the land is non-agricultural. This clearly creates enormous difficulty where for example grass is mown for hay and is sold to a fodder dealer. Unless the fodder dealer could demonstrate that the hay is then sold on to purchasers for feeding only to agricultural animals then HMRC argued that this was not part of the human food chain.
A similar situation could apply with, for example, combinable crops sold to a merchant and the merchant subsequently selling on to a horse feed manufacturer. It also raises significant issues for any non-agricultural crops, for example those grown as an aerobic digester feed stock. The case is not yet agreed with HMRC but it is unlikely that they will pursue this point through the Tribunal.
HMRC are also challenging an application for Agricultural Property Relief on a small farm with modest income where, due to the relatively poor quality of the land and soils, the majority of the farm’s income is made up of Basic Payment and Stewardship Scheme incomes. HMRC have sought to challenge this case on the basis of the level of sales for the business, implying that there ought to be some form of minimum farming standard and level of profit. In the current agricultural climate, small farms such as this are doing well to generate a profit at all and their reliance on subsidies will come as no surprise to those in the industry. This does not make the holding any less suitable for Agricultural Property Relief and the only recognised test in this regard is whether the business was one of trade with a clear intention to make profit or not.
Even in cases where Agricultural Property Relief is allowed in principle, HMRC seek to restrict the relief available to agricultural value, looking for deductions to any parts of the property which they believe have any amenity value over and above the basic agricultural value. This clearly has significant implications for land and farms close to our towns and cities where elements of the valuation may well be attributed to their amenity.
Those of us who are Registered Valuers work hard at preparing comprehensive, accurate Inheritance Tax valuations which are robust and capable of scrutiny by HMRC. We are aware of the recent comments of one particular member of the Valuation Office Agency who advised HMRC via email (inadvertently copied in one of our valuers) that “I have not yet looked at this file in detail or inspected the property but it appears to me that the values reported are a little high.” How they ascertain that without looking at the file in detail or inspecting the property is beyond us!
It is clear from our experience that HMRC are under pressure to deliver as much tax revenue as possible from Inheritance Tax and they are seeking to challenge applications for Agricultural Property Relief for all sorts of reasons. Good professional advice is required as to the strength of an individual case, but those appointed as Executors should not be afraid to take a robust stance with HMRC if a case warrants it.
There has been much debate in recent years as to the future of Agricultural Property Relief, however we believe it is unlikely to be a priority for the current Government to drive through changes to relief available for a tax which generates a relatively small proportion of annual tax income, an even smaller proportion of which relates to agricultural property. In any event, should Agricultural Property Relief come under fire, for many Business Property Relief unless reformed as well, could offer a viable alternative. The opportunity for a significant increase in Government income is limited.
For further information, contact Richard Scriven on or email him here