Tax Implications of Inheriting a Farmhouse

Inheriting a farmhouse can be done free of inheritance tax if it qualifies for IHT agricultural property relief. The relief applies to the agricultural value of the agricultural property so on inheriting a farmhouse IHT relief of up to 100% can apply. However, HMRC scrutinises IHT agricultural property relief claims carefully and focus not on the farm but on the farmhouse. HMRC want to know whether the farmhouse is at the centre of a proper working farm or whether it is, in reality, a country house surrounded by land acquired for a country lifestyle and with an eye to the IHT exemption for inheriting a farmhouse, instead of for the purpose of allowing the owners to generate a major part of their income from farming the land.

What Qualifies as a Farm for Tax Purposes?

“Agricultural property” for IHT relief purposes is defined in section 115(2) Inheritance Tax Act 1984 and in relation to farmhouses it refers to: “farmhouses, together with the land occupied with them, as are of a character appropriate to the property.”

The IHT exemption for farmhouses and farms only applies to the agricultural value of an agricultural property.

The farmhouse must be of a “character appropriate” to the landholding and the agricultural value to which the exemption applies may be less than the open market value. In the second Antrobus case the Lands Tribunal decided that the agricultural value was only 70% of the open market value of the property, and so 30% of the value was subject to Inheritance Tax.

What are the Tax Implications when Inheriting a Farmhouse?

There are three types of relief that may be available when inheriting a farmhouse.

First, the IHT Nil Rate Band of £325,000 together with any unused Nil Rate Band transferred from a deceased spouse.

Second, the Residence Nil Rate Band extends the Nil Rate Band by an extra £150,000 when an individual’s main residence is passed to their direct descendants on death. However, this is reduced by £1 for every £2 by which the deceased’s net estate exceeds £2million, before reliefs and so may not be of use to agricultural property owners.

Third, IHT Agricultural Property Relief (“APR”) is given on the agricultural value of the agricultural property. APR is at 100% where the transferor has the right to vacant possession, or the right to obtain it within 12 months (or by concession within 24 months) and in other cases the relief is at 50%. The transferor can qualify for APR by either occupying land for the purposes of agriculture for two years before the transfer, or by owning land for seven years before the transfer which someone else occupies for the purposes of agriculture. It is worth bearing in mind that IHT Business Property Relief (“BPR”) may be available on non-farmhouse agricultural assets on the difference between the agricultural value and the open market value.

Can You Avoid Capital Gains Tax on Inheriting Farmland?

Yes, at the moment the value of farmland is rebased to market value at the date of death so the capital gains that accrued on farmland up to the date of death are wiped clean and only increases in value since the date of death are potentially liable when the land comes to be sold by those inheriting it. The Treasury is known to be looking at this critically in situations where the land has benefited from APR or BPR and may change the base cost uplift in such cases.

Are there any Exemptions When Inheriting a Farmhouse?

Yes, the previous capital gains that accrued on increases in value up to the date of death are wiped and APR can apply to exempt 100% of the agricultural value of the farmhouse from IHT.

What is the Agricultural Property Relief?

The relief applies to the agricultural value of the agricultural property so on inheriting a farmhouse IHT relief of up to 100% can apply. However, where the open market value of the farmhouse exceeds the agricultural value then the excess can be taxed.

How Can Patrick Cannon Help?

If you or your clients are dealing with tax issues surrounding the inheritance of a farmhouse or farmland contact Patrick Cannon to ensure that the available IHT exemptions are fully taken into account and any relief is claimed. Patrick can also advise on the Capital Gains Tax and SDLT consequences at the same time.