Death and Taxes

Most of us have come across the old saying that “… in this world, nothing is certain but death and taxes …” and Governments, of various persuasions, have tried very hard to combine the two in death duties.  The modern form of death duties – inheritance tax – is 40%, so anything that can mitigate inheritance tax is well worth considering.  Until relatively recently the working farming community was protected from the Chancellor of the Exchequer’s interests in their assets by the sturdy protection of “Agricultural Property Relief” (APR).  The breach that has now appeared in these defences is in connection with farmhouses, and relates to various cases (there has been more than one) concerning Miss Rosemary Antrobus. 

Miss Antrobus, until her death, ran a farming operation at Crookhill Priory, a farm of 126 acres or thereabouts, in Worcestershire.  Her family had been on the same working farm since 1907.

The first line of attack, which the Revenue took, was to claim that the farmhouse, Tudor with Georgian additions, was not of a character appropriate to the farm.

In effect, the Revenue was seeking to deny APR on the grounds that this particular farmhouse was “too grand” to be a mere farmhouse.  However, the land agent called on as an expert witness against the Revenue was able to produce comparables from 27 typical farmhouses in the area, providing evidence that Miss Antrobus’ farmhouse was by no means unusual, and could be considered appropriate to the size of the farm.

On this basis the Revenue lost “Antrobus 1”. 

Unfortunately, the Revenue were not minded to let matters rest there, and attacked again with a different approach.

If the Crookhill Priory farmhouse was eligible for APR, how was it to be valued?  The Revenue had evidence that the farmhouse, on the open market, would fetch £608,475.00.  The Revenue then put forward the view that farmhouses like this were subject to an implied “agricultural occupancy condition” and could be valued for inheritance tax at 70% or less of the open market value of a house or property with no such condition attaching to it.  In other words, the Revenue sought to distinguish between the agricultural value of the farmhouse (with a hypothetical restrictive covenant for agricultural use only) and the open market value.  And they put forward the argument that the agricultural value would be approximately 70% less than the open market value.

The Revenue argued that the 30% difference should be subject to inheritance tax.  The sum concerned was £182,542.50 which, at 40% inheritance tax, would yield to the Revenue (and cost the executors of the estate) £73,017.00.

The arguments went back and forth but, unfortunately for farmers in general, the Land Tribunal (who had to make the decision) accepted the Revenue’s reasoning.  It covered itself slightly by deciding that the Revenue’s discount of 30% might not be a fixed figure but was, in the circumstances of the Antrobus case, not unreasonable. 

Worried that its decision might be appealed the Land Tribunal went on to say that in different circumstances a smaller discount of 15% might be appropriate.

So where does this leave working farmers seeking to make provisions for the future?  It now seems that the Revenue will seek to attack the agricultural property relief on farmhouses by factoring in a claim for tax on 30% of the open market value of the farmhouse.  This may well be the starting point, and decisions could be reached on much lower discounts.  Equally, the Revenue may, in certain circumstances, seek to impose an inheritance tax charge on 40% of the value of the farmhouse.  No guidelines have been formalised as yet.  The moral to be drawn is probably the same one that existed before the Antrobus cases.  In order to ensure a smooth transition between the generations, advice on the structure of inheritance provisions between the generations should always be taken sooner rather than later.  It also needs to be continuously reviewed.

July 2006