SVM112020 – IHT Agricultural
Property Relief: Practice Notes / dealing with companies where AR
may be an issue
These notes are intended to be for the use of Share Valuers.
- The Val 70 should indicate whether agricultural relief has been
claimed but there is no statutory requirement for a claim to be
made before relief can be allowed.
- Any question concerning relief or, where appropriate, the
amount of the value transferred entitled to relief should be dealt
with concurrently with the valuation negotiations - NOT left until
they are concluded.
- Some aspects of AR need to be referred to the Appeals Team.
Before any reference to the Appeals Team is made, via your team
leader, you should ensure that a full analysis of the facts has
been made and the specific problem(s) identified.
- All cases where AR has been claimed should be referred to a
risk assessor.
- In calculating the part eligible for relief, debts and
mortgages which are specifically charged on agricultural property
should be deducted from the value of the property. Where the
agricultural value of that property is less than its full value,
the liability should be apportioned pro rata between the
agricultural and non-agricultural values.
- Any case where difficulties arise should be referred to the
Appeals Team.
- Agricultural Tenancies - For a brief history of the law
relating to agricultural tenancies and a description of the types
existing today and their characteristics see Chapter 24 of the
Inheritance Tax manual at IHTM24201 et seq.
We frequently meet cases where Business Relief (BR) is due but
cases where AR may be due are much less common. One reason for this
is simply that shares in the vast majority of trading companies
will qualify for BR, subject to the required conditions being
satisfied, whereas AR will only be an issue if the company owns
agricultural property. Another reason is that shares in a company
whose only or main business is farming will probably qualify for
both AR and BR. According to s.114, AR takes precedence over BR but
if it is clear that one relief or the other will apply to the
entirety of the value transferred, it may be unnecessary to carry
out all the enquiries needed to establish that AR is due.
Usually, therefore, we only have to consider AR where BR is
not available for some reason. E.g. It may be that the
company’s principal activity is to let out land (including
agricultural land) so that BR is precluded by s.105(3). However, AR
may still be due (at 100% if the land was let on or after 1
September 1995 or at 50% if it is subject to an earlier tenancy) if
the relevant conditions are met. Where BR is due, it generally
applies to the entire value of the shares being transferred.
AR, on the other hand, is only given on the value of
theshares in so far as it is attributable to the agricultural
value of agricultural property.
AR is a complex relief and is dealt with in considerable
detail in Chapter 24 of the Inheritance Tax manual at IHTM24000.
There have also been a number of Special Commissioners’
decisions relating to AR. The instructions in this chapter
concentrate on the sections of Part V, Chapter II IHTA which deal
specifically with companies. Because of the complexity of the
relief and (for Shares and Assets Valuation) its comparative
rarity, valuers should consult the Appeals Team if they are in any
doubt. In turn, because our treatment of AR is constantly refined
as a result of judicial decisions, the Appeals Team will consult
colleagues in IHT Technical Group and Litigation as necessary.
Things to remember: -
- AR can only be due if the transferor
(trustees in relation to discretionary trusts) has a controlling
shareholding in the company immediately before the transfer (see
SVM112040).
- If you are considering the availability of
IHT reliefs in respect of a majority shareholding in a company
which prima facie farms its own land, you should examine the
accounts critically to ensure that the company is trading and to
consider the level of trading. You should also obtain full details
of the land and buildings owned by the company and of who occupied
any farmhouse/cottages and on what terms. If the farmhouse/cottages
are not occupied for agricultural purposes (
SVM112060 et seq.), they will not
qualify for AR. They may still qualify for BR (if they are let
properties in a hybrid – mainly trading – business) but
you should consider whether, if occupied by the transferor or a
connected person, they should be regarded as excepted assets under
s.112(6) – see
SVM111220.
- You should take care in considering the
ownership and occupation tests (
SVM112060 et seq.). You need to know
precisely what agricultural activities were being carried out on
the various parts of the company’s land and by whom. If there
was very little activity and especially if the company owned the
farmhouse, consult the Appeals Team.
- Where it is available, the relief applies
to the value of the shares in so far as it is attributable to the
agricultural value of agricultural property. Agricultural property
means “
agricultural land or pasture and
includes…….such cottages, farmbuildings and farmhouses, together with the land occupied
with them, as areof a character appropriate to the property.” –
s.115(2). If the company ownsa large farmhouse but only a small area of land or if most
of the land has beenlet out but the farmhouse (of any size) is in hand, refer
to the Appeals Team. The Appeals Team, taking advice as
necessary from IHT colleagues and the VOA, will consider such
questions as
- Is the house a farmhouse at all? [A farmhouse was described in
one case which went to the Special Commissioners as a
“dwelling for the farmer from which the farm is
managed”.]
- Was the house occupied for the purposes of agriculture for the
requisite period? (See
SVM112060.)
- Was the house of a character appropriate to the agricultural
land in the estate? If not, it will not qualify as agricultural
property. Note that for this test we should take into account all
the agricultural property in the transferor’s estate, not
just the property farmed by the company – see Chapter 24 of
the Inheritance Tax manual at IHTM24033 and IHTM24036.
- The main situation in which AR is a live
issue for SAV is where the company does not qualify for BR (usually
because of s.105(3)). Assuming that all the conditions for AR are
satisfied, the relief will be due in so far as the share value is
attributable to the agricultural value of agricultural property.
You will need to ask the DV for his opinion of the agricultural
value of the agricultural property and (if different) his opinion
of its open market value – see
SVM112170. If the land and buildings
qualifying for AR are let under tenancies commencing before 1
September 1995, the rate of AR on them will be 50% - see
SVM112030. Any land or buildings which
were in hand or were let under tenancies commencing on or after 1
September 1995 will qualify for relief at 100%.
- The following examples illustrate how the
relief might apply in practice to shares subject to a charge to
IHT. The examples are on the basis of a transfer on death or a
lifetime transfer of the transferor’s entire interest.
Example 1
The value of a 60% shareholding in a company which mainly
lets out its agricultural land and buildings is agreed at
£500,000. The company has gross assets (of all kinds) of
£1.3million. The agricultural value of its land and buildings
(let out under a pre-September 1995 agricultural tenancy) is agreed
at £800,000 and the agricultural value of the land still
farmed by the company is agreed at £50,000. AR at 50% will
apply to
| £800,000 x | £500,000 |
| £1,300,000 | |
giving relief of £307,692 × 50% = £153,846
AR will also be due on
| £50,000 x | £500,000 |
| £1,300,000 | |
i.e. on £19,231 at 100%.
The total AR due is thus £173,077, leaving £326,923
as the chargeable value of the holding.
|
If a debt such as a mortgage is secured on a particular asset,
then the value net of that liability is brought into account in the
calculations.
Example 2
If in Example 1 there were a mortgage of £150,000
secured on the let agricultural land valued at £800,000, the
value qualifying for AR at 50% would be £650,000. The part of
the £500,000 share value which qualified for AR at 50% would
be
| £650,000 x | £500,000 | = £282,609, giving relief of
£141,305 |
| £1,150,000 | | |
As can be seen, the denominator in the fraction would also be
reduced by £150,000 to £1,150,000. A debt secured on land
not qualifying for relief would similarly be deducted from the
denominator of the fraction. In calculating the fraction of the
share value which qualifies for relief, therefore, deduct any
liability secured on the qualifying agricultural property from the
numerator and all secured liabilities, on whatever property they
are secured, from the denominator.
|
Example 3
If the facts were as in Example 1 but the Valuation Office
Agency (VOA) reports that the let land and buildings had an agreed
market value of £1 million as opposed to their agricultural
value of £800,000, we would need to divide £800,000 by
the value of all the gross assets (including the let land at
£1 million, the total is now £1.5 million) and apply this
fraction to the value of the holding (which might be agreed at,
say, £600,000 as a result of the VOA increase). Thus
£320,000 of the £600,000 value would qualify for relief
at 50%.
In addition,
| £50,000 x | £600,000 | = £20,000 would qualify for AR at 100% |
| £1,500,000 | | |
This example assumes there are no secured liabilities.
|
Example 4
A company’s business is mainly that of
farming in its own right, so BR is not precluded
by s.105 (3). The value of a 55% shareholding is agreed at
£750,000. The company owns agricultural property with a market
and agricultural value of £1.2 million. It has total gross
assets of £1.8 million and there are no secured debts. Amongst
the assets is a cottage (value £200,000) which is merely the
home of the transferor’s son, who has never worked in the
farming business. The value of the shares would qualify for AR at
100% in so far as it is attributable to the agricultural value of
the agricultural property i.e. on
| £1,200,000 x | £750,000 |
| £1,800,000 | |
However, equally, BR would be available on the full value of the
shares. It appears that only one asset would qualify for neither AR
nor BR. The cottage occupied by the son was not occupied for the
purposes of agriculture (so no AR) and it was used wholly or mainly
for the personal benefit of the son (no BR in view of s.112(6)).
Thus
| 200,000 x | £750,000 | will not |
| £1,800,000 | | |
qualify for either relief.
|
If in Example 4, the agricultural property had a market value of
£2.8 million as opposed to its agricultural value of £1.2
million (because of amenity or development value), the part of the
share value attributable to the additional £1.6 million value
would qualify for 100% BR, assuming the normal conditions for
relief were satisfied.
