The law of the land - the availability of agricultural property relief in Upper Tax Tribunal decision

Monday, 01 July 2013
Toby Harris discusses the availability of agricultural property relief in a landmark Upper Tax Tribunal decision.

HMRC v Hanson

The Upper Tribunal, in HMRC v Hanson1 has confirmed the decision of the First-tier Tribunal in the dispute between the Hanson family and HMRC over the availability of agricultural relief (APR) on the Old Bakehouse, Great Horwood, Buckinghamshire. The issues were described in a case note published in Private Client Business, issue 3, 2012. Two arguments put forward by the taxpayer failed, but, contrary to the previous decision of the Special Commissioner in Rosser v IRC, the First-tier Tribunal did allow APR, on the basis that while s115(2) of the Inheritance Tax Act 1984 (IHTA 1984) requires a connection or nexus between a ‘farmhouse’ and other agricultural property, that nexus may be met by common occupation rather than common ownership.

HMRC made it clear before the First- tier Tribunal that this was, for them, an important point, since the issue of nexus arises frequently in practice. Thus the appeal of HMRC from the decision of the First-tier Tribunal was widely expected.

In a lengthy and scholarly judgment, the Upper Tribunal considered each of the arguments put forward on behalf of HMRC by Jonathan Davey of Counsel, beginning with the established HMRC approach that s115 cannot be construed in isolation, but only in the context of IHTA 1984 as a whole. That approach owes a good deal to a historical review of the legislation, but the Upper Tribunal found it unhelpful, given the many changes – from estate duty to capital transfer tax and inheritance tax (IHT) – and accepting that the old legislation was no clearer than the current statute. In response to Davey’s argument, which was based on the ‘estate’ as the unit of charge for IHT, the Upper Tribunal examined ownership, whether of the freehold or of a lesser interest in land, and it returned to that analysis at several points in the judgment. Davey raised four points in support of his argument that his interpretation of s115 was to be preferred to that of the taxpayer.

1. Land, not houses

Agricultural land is at the centre of the definition and the purpose of APR, rather than houses. The First-tier Tribunal had considered that s115 required farmhouses to be of a character appropriate to such land, but that they need not be in the same ownership, and that to allow relief based on common occupation would be within the scheme and purpose of the legislation. The Upper Tribunal, after considering elements of the judgment in Starke v IRC [1999] 1 WLR 1439, did not feel that that case supported Davey’s argument.

2. Limbs 2 and 3 of s115(2)

There is a distinction between the part of s115(2) IHTA 1984 known as ‘limb 2’ and the third part, known as ‘limb 3’. Limb 2 emphasises occupation, which limb 3 does not. While the Upper Tribunal, and the First-tier Tribunal before it, had noted a difference between the language of limb 2 and limb 3, there seemed to be no HMRC policy reason for a distinction in terms of the requirement of ownership between land in the two separate limbs.

3. Practice

Davey considered the practical application of the interpretation argued for by the taxpayer, which raised difficult questions about the level or quality of occupation that might be sufficient for the relief. The Upper Tribunal did not accept that point.

4. No need for land?

Finally, Davey considered that the interpretation put forward by the taxpayer was inherently implausible because, if applied literally, it might allow an estate to benefit from APR even if it held no agricultural land. That outcome would be inconsistent with elements of the Court of Appeal decision in Starke, with the recognition by the First-tier Tribunal in Hanson that agricultural land is ‘the core of the definition’, and with the purpose of the relief as described in Higginson’s Executors v IRC [2002] STC (SCD) 483. However, in a detailed examination of these arguments, and by reference to various possible scenarios, the Upper Tribunal came to a different conclusion. The result of that examination was that insistence on legal ownership as the only nexus between the house and land itself raised many difficulties, at least as many as were feared by Davey from the alternative interpretation that common occupation would be good enough.

More thoughts on farmhouses

The Upper Tribunal then added some useful comments on the meaning of ‘farmhouse’ in s115(2) to supplement, but not depart from, the description given by Dr Bryce in Arnander (Executors of McKenna) v IRC [2006] UKSPC 00565. The ‘primary focus’ of the word ‘farmhouse’, which is not defined in the legislation, ‘was in the past, we think, on the house on, or close by, an identifiable farm where the farmer responsible for the operation of a farm lived with his family and from which he operated his farming activities. For a house to be a “farmhouse” there had to be some functional connection between the house and the farm. If that connection ceases to exist, we consider that the house ceases to be a farmhouse.’

The Upper Tribunal continued: ‘The question whether or not a house attracts relief falls more naturally to be dealt with in the first place under section 115(2) and only if it is capable of attracting relief is it appropriate to move on to section 117 to see if the occupation and ownership tests are satisfied.’

The Upper Tribunal then considered all the possibilities of the nexus that, it was agreed, must exist between the farmhouse and the land. After a review of all the permutations of ownership and tenancy, some of which produced conflicting results, the tribunal commented on the approach of the taxpayer. ‘To test whether a house is a farmhouse, it is necessary, on this approach, to investigate what is happening on the ground. The answer has nothing, or very little, to do with ownership and everything to do with use and occupation. The house is a farmhouse because it is occupied… together with the farmland and is the base from which [the leaseholder] conducts his farming business.’

The Upper Tribunal referred in passing to my arguments on behalf of the taxpayer, commenting: ‘However, we do refer to what we see as the main thrust of his argument, with which we agree, that it is appropriate to look at the situation on the ground in order to establish the reality of the farming unit. A single farming unit is likely (at least it is not easy to envisage a case where this is not so) to be in a single occupation. And that is why occupation can be taken as a reliable touchstone for identifying “the property” referred to in limb 3 [of s115(2)].’

Based on this reasoning, the Upper Tribunal preferred the interpretation claimed by the taxpayer, but concluded: ‘We would only add that we do not decide that common occupation will always and necessarily constitute a sufficient nexus. It may be right that there can be situations in which, although there is common occupation of agricultural land and a cottage, farm building or farmhouse, there is not a sufficient nexus. We have not thought of an example where this would be so, but do not rule out the possibility. In any case, it is unlikely that such an issue would ever arise since the “character appropriate” test might itself not be fulfilled in such a case.’

Whether a house is a farmhouse has very little to do with ownership and everything to do with use and occupation

All in all, the decision of the Upper Tribunal is one of strong common sense, ably supported by intricate academic examination of the statute, relevant cases and all the arguments brought to the appeal. It was particularly encouraging that the Upper Tribunal did not lose sight of the fact that the Hanson land was a working farm, with livestock and little reliance on outside contractors. It was the exact sort of operation that ought to qualify for APR. In farming families it is often the case that the house from which the farm is run does not lie in the same ownership as some or all of the farmland, and this decision will protect that property from the full burden of IHT.

  • 1. Upper Tribunal, Tax and Chancery Chamber [2013] UKUT 224 (TCC)
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Toby Harris

Toby Harris TEP is a member of STEP Norwich and Norfolk branch and represented the taxpayer before the Upper Tribunal.

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