BIM55255 - Farming: receipts and expenses: farmhouse rent

Farmhouse rents pose particular problems in arriving at a private use adjustment because the rent charged is often charged for the whole of the farm without a separate amount being attributable to the farmhouse itself.

Farmers are assessed on the profits or gains of their farming trade as trading income because ITTOIA/S9 and ICTA88/S53 (1) specifically directs that farming profit shall be so assessed. The definition of ‘farming' for this purpose appears in ITTOIA/S876 and ICTA88/S832 (1) such that farming requires the occupation of land for the purposes of husbandry.

This definition was introduced following the adverse decision in Korner and Others v CIR [1969] 45TC287 and it is worth quoting from the speech of the Minister, Mr Taverne, who said in the committee stage of the debate on 16 June 1969,

”everyone in the committee wants to achieve the same purpose, which is to put the practice back where it was before the Korner case - that is, to apportion expenditure both on the farmhouse which is used as a dwelling house and on farm properties in such a way that what is a proper business expense for the running of the farm is allowed, and what is expenditure on domestic purposes is not allowed; the clause, I am advised, will restore the previous practice”

Farmers are assessed to tax as occupiers of farmland excluding residential premises and it is only the rent of the farmland that can properly be deducted as an expense wholly and exclusively incurred for the purposes of the farming trade. The fact that both the farmhouse and the farmland form the subject of a single lease cannot make the farmhouse part of the farmland in view of the clear direction to the contrary in ICTA88/S832 (1), ICTA88/S74 and ITTOIA/S34. As the rent paid covers both the farmhouse and farmland, it is necessary to apportion the total to arrive at the rent appropriate to each.

The proportion of the rent that relates to the farmhouse will depend on the facts of the case concerned. The taxpayer may argue that the part of the rent relating to the farmhouse is represented by the difference between value of land without a house and the value of land with a house. However that difference is not of direct relevance since you are dealing with land with a house. On the other hand pointing to rents commanded in the open market by similar properties which are not farmhouses may well give a figure which is too high since the fact is that the farmhouse is a farmhouse with the associated inconvenience of being used for the farming business. But these two views will, at least, serve to show the range within which a reasonable figure would be expected to lie.

In the past adjustments were often based on the gross annual value and you may still see them in some cases. Adjustments based on gross annual value may well have produced realistic figures in days gone by but are unlikely to do so nowadays since gross annual values have not been adjusted for many years. Your aim should therefore be to produce an adjustment that is realistic in amount and fair to both sides.

In cases of difficulty the District Valuer will be able to assist you in determining where the correct answer lies.

The next step is to establish the proportion of the rent relating to the farmhouse that is to be allowed because it represents business use. This is, of course, a question of fact to be decided by agreement or by the Commissioners in the event of disagreement.