IHTM24253 – Other issues: Comparison with the income tax provisions (for farming and exploitation of land)

Where land is owned by an individual and that land is a source of income or profits for the individual or another person, the profits are chargeable to income tax (or corporation tax). The way in which those profits are taxed can provide a useful indication of the purpose for which the land is occupied and whether or not this is an agricultural purpose. It should not, however, be treated as conclusive for inheritance tax purposes as there are different factors to take into account for the different taxes.

Profits from income that arises from farming and from the exploitation of land may be taxed in two ways, either as profits from a trade or as profits from a property business. You will see profits from a trade reported in an individual’s income tax self-assessment return usually as income from self-employment or from a partnership. Profits from a property business fall under the heading of land and property.

Where a business is carried on by another person, for example a company or a trust, on land owned by an individual then the individual’s income tax self-assessment return may include dividends, income from employment or income from trusts. In these cases, it is necessary to look at how that other person is taxed to determine whether the profits are taxed as from a trade or from a property business.

If land is in use for the purposes of a farming business and the profits from that business are taxed as profits from a trade (either under sections 5 and 9 ITTOIA 2005 or under section 18 ICTA 1988, Case 1 Schedule D) then it is likely that the land is also occupied for agricultural purposes for inheritance tax. However, there are exceptions to that general principle and you should not base your decision only on the income tax treatment.

Unlike most trades, there are statutory definitions of farming and market gardening in section 996 ITA 2007.

“Farming” means the occupation of land wholly or mainly for the purposes of husbandry and includes hop growing, the breeding and rearing of horses and grazing of horses in connection with those activities, and the cultivation of short rotation coppice. “Market gardening” means the occupation of land as a garden or nursery for the purpose of growing produce for sale.

All farming is treated as a trade even if the normal badges of trade are absent, for example breeding horses as a hobby. All the farming carried on in the United Kingdom by a particular person (or partnership, or body of persons) should be treated as a single trade. (But, where an individual carries on farming activities both as a sole trader and as a partner, or as a member of two different partnerships, the separate activities are treated as separate trades.) The profits of a person who carries on farming activities, in the same capacity, at more than one farm should be computed in a single sum.

In contrast, a property business consists of every business which a person carries on for generating income from land, which is itself defined as exploiting an estate, interest or right in or over land as a source of rents or other receipts. Certain activities including farming, market gardening and other commercial occupation treated as a trade are excluded from being a property business. The profits of a property business are taxed under section 268 ITTOIA 2005 or section 15 ICTA 1988 (Schedule A).

The distinction between land occupied for the purpose of farming and land occupied by a property business is less important for income tax purposes, where all the profits are taxed one way or another, than it is for inheritance tax purposes. For inheritance tax, land occupied for agricultural purposes may qualify for agricultural property relief at 100% or 50% (business property relief may also need to be considered) but land exploited for rental income may get no relief at all. It is important, then, to consider all the facts and to use the income tax treatment only as an indicator of the purpose of occupation and not as determinative.

Further information about the income tax treatment of farming activities can be found in the Business Income Manual.