The recent First Tier Tribunal decision in Hanson v The Commissioners for Her Majesty’s Revenue and Customs (HMRC) is a fascinating outcome that goes in favour of the taxpayer and provides much needed clarification when deciding whether a farmhouse qualifies for Agricultural Property Relief.
The appellant, Joseph Nicholas Hanson as Trustee of the William Hanson 1957 Settlement, appealed against a determination that Inheritance Tax was payable on a house (11 The Green, Great Horwood) occupied by the deceased, Mr Joseph Charles Hanson. The case revolves around the meaning of section 115(2) Inheritance Tax Act 1984 (IHTA) and in particular the ‘character appropriate’ test.
‘Agricultural Property’ is sheltered from Inheritance Tax under the IHTA and is defined as ‘agricultural land or pasture and includes woodland and any building used in connection with the intensive rearing of livestock or fish if the woodland or building is occupied with agricultural land or pasture and the occupation is ancillary to that of the agricultural land or pasture; and also includes such cottages, farm buildings and farmhouses, together with the land occupied with them, as are of a character appropriate to the property’.
Accordingly, for a farmhouse to qualify for Agricultural Property Relief, it must first be established that it is a farmhouse for the purposes of the relief, and second, if it is, that it is of a ‘character appropriate’ to the agricultural property occupied with it.
The respondents accepted that 11 The Green was a farmhouse so the issue of character appropriateness was the primary issue for consideration by the Special Commissioners.
In relation to the land to be taken into account in assessing character appropriateness, the case of Rosser v IRC established the appropriate test whereby a sufficient ‘connection’ or ‘nexus’, needs to be established between property in which the relevant taxpayer had an interest. Referring to Rosser, Counsel for IRC submitted that the nexus between cottages, farm buildings and farmhouses within the definition with agricultural land or pasture, woodland or buildings is a nexus of occupation and ownership rather than just occupation.
The Tribunal was not persuaded. Instead they concluded that, when deciding whether a farmhouse is of a character appropriate, one should not be limited to looking at the land owned but can take into account all land occupied for the purposes of agriculture. One may look at the ‘reality of the agricultural unit and take into account land occupied as part of the farming business in determining the purpose for which the farmhouse is occupied’.
The decision thwarts HMRC’s persistent endeavours to limit the scope of the test for character appropriateness, as evidenced in the recent case of Golding v HMRC in which Clive Beer of Savills acted as expert witness for the taxpayer. In Golding, HMRC argued unsuccessfully that character appropriateness should be limited to the second ‘Antrobus Test’, with the issue turning primarily on the profitability and viability of the farm to sustain the house. Clive summarises: “The decision in Hanson is a victory for the taxpayer and adds to the emerging case law helping to keep open the scope of Agricultural Property Relief and reduce the tax burden on agricultural property.”