In an important ruling for the farming community and tax professionals, the Upper Tribunal (UT) has granted agricultural property inheritance tax relief in respect of a farmhouse even though the building and the land associated with it were not in common ownership at the time of the deceased’s death.
The house once stood at the centre of an 800-acre farm; however the land had over the years been sub-divided between family members. At the date of the deceased’s death, he still owned the house but had divested himself of ownership of the land. The house was occupied by the deceased’s son who owned and actively farmed 128 acres of land, along with other smaller holdings.
Her Majesty’s Revenue and Customs (HMRC) refused inheritance tax relief on the basis that the house did not fall within the definition of agricultural property contained within section 115(2) of the Inheritance Tax Act 1984. It was submitted that, as the 128 acres were not owned by the deceased on his death, they had to be left out of account when assessing whether the house was of a character appropriate to an agricultural holding.
Those arguments failed at first instance and, in dismissing HMRC’s appeal against that decision, the UT ruled that the son’s occupation of both the house and the land amounted to a sufficient nexus between them to merit the grant of inheritance tax relief.
Rejecting HMRC’s argument that only an ownership nexus between land and house would suffice, the UT noted that such a narrow interpretation of section 115(2) would have unsatisfactory practical consequences. The broader construction contended for by the estate reflected a more natural reading of the provision and would not undermine the scheme of the legislation.