The Naked Investor: Elephant test a tough one for farmers
Claiming Agricultural Property Relief (APR) on a farm, on the death of the owner, is raising a few eyebrows these days.
It has commonly been understood that if you owned a farm with a house on it then it would automatically qualify for 100% APR.
The problem is that recently HMRC has been taking a much more careful look at this.
Its main test is the "character appropriate" test.
This means that the farmhouse will only qualify for APR if it is proportionate in size and nature to the requirements of the farming activities conducted on the agricultural land or pasture in question.
But how do you define "character appropriate"?
In a recent case (Antrobus versus R), the judge decided to apply what he called the elephant test. This has since been adopted by the HMRC (and you can visit its website if you do not believe me).
The premise is that although an elephant is very difficult to describe accurately, everyone knows an elephant when they see one.
This is then applied to the farmhouse. However, much of the difficulty revolves around size.
Elephants come in many different sizes, but they are all elephants. Houses standing on agricultural land also come in many sizes, but they are not all farmhouses that will qualify for APR.
In the McKenna case in 2003 both husband and wife died within five months of each other.
The property consisted of Rosteague House, 187 acres (of which 110 were agricultural land), some farm buildings, a cottage, flat, stables and a lodge.
From 1984, when Mr McKenna retired, the land had been farmed under various contracts and so Dr Brice, sitting for the Special Commissioners, decided that it did not qualify for 100% APR.
The judgement went as follows: "Rosteague House was not a farmhouse. Section 1152 of the IHT Act 1984 made it clear that the agricultural land was paramount. All other things must be ancillary or of a character appropriate to the land."
Furthermore, she agreed with the definition in a previous case that a farmhouse is a dwelling from which the farm is managed. And also that the farmer of the land is the person who farms it on a day to day basis rather than the person who is in overall control of the agricultural business conducted on the land.
Finally, Dr Brice concluded that whether a building was a farmhouse or not was a matter of fact to be decided on the circumstances of each case and according to ordinary ideas of what is appropriate in terms of size, content and lay-out in the context of particular farm buildings and the area of land farmed.
This last point is tantamount to the elephant test. In this case the so-called farmhouse was considered too grand perhaps for the reduced farming purpose for which it was in fact used.
Conclusion? APR cannot be taken for granted.
There is limited space here to provide all the detail but I have some notes, available by request from firstname.lastname@example.org.
Nicholas Watts is an independent financial adviser with Positive Solutions Financial Services (www.thinkpositive. com), which is regulated by the Financial Services Authority.