HMRC Scrutiny Of Rural Land And Property
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Originally published 11 September 2006
HMRC have stated that they will be looking closely at rural land and
The Shoot Project Team from Norwich VAT Office and the HM Revenue & Customs (HMRC)
are on the road and carrying out their ‘programme of visits to shoots across the
UK’ as promised in their April 2006 missive (www.hmrc.gov.uk). To quote this
document: ‘You may get a visit in the coming year and some of these visits may
be made without an appointment’.
One of the key areas of the VAT debate (and the possible collection of extra
VAT by HMRC) is over the granting of the shooting rights by the landowner. On
the assumption that the landowner is VAT registered, output VAT at the standard
rate of 17.5% will have to be charged on the granting of the right to shoot.
Historically, the grant has been misdescribed as the zero-rated rent of land.
If it is accepted that the landowner must charge VAT on the granting of the
rights to shoot to the syndicate, then there is a very devilish twist in the
tale. If the landowner is a member of the syndicate, HMRC will expect VAT to be
accounted for on the open market value of the grant of rights to the syndicate,
and also on the supply of the services of a gamekeeper etc. These arrangements
are dealt with on the basis of barter and no money changes hands (or a reduced
value is calculated). From a VAT point of view, however, a supply can take place
even if no money changes hands.
In order to claim 100% Inheritance Tax (IHT) relief, it is essential to show
that the farm is a business, trading as a farm and that the farm accounts show
that the activity is sufficient to support the claim for Inheritance Tax relief
on the farmhouse and the land.
It is not uncommon that perhaps due to age, the principal farmer has let
neighbours keep cattle on his land in return for mowing, hedging, fertilising,
topping etc and other maintenance activities on the farm. In such a case, the
main activity will not show up in the accounts. Part of the remedy would be a
properly worded grazing agreement for the neighbour’s stock, which would be seen
by HMRC as farming for tax purposes and should ensure that IHT relief is
In order to claim Rollover relief or Business Asset Taper Relief (BATR)
(which can lead to the effective 10% rate of Capital Gains Tax) it is essential
to show that the farming assets are business assets, which means that they must
be used in the business.
If all the trading activities are sheltered via barter it is tricky to prove
that the land is actually a business asset and so these reliefs may be at risk.
For example, if an area of the land were to become available for development it
could be very tempting for HMRC to challenge whether this is actually a business
asset used in the business if that use is not supported by the business
accounts. Ironically, the use of barter could lead to the loss of valuable IHT
and CGT reliefs.
The ‘special value’ of a farm/landed estate over and above the agricultural
value (s.115(3) IHTA 1984), e.g. potential development value is the ‘hope’
IHT is a tax on values – specifically on the diminution in value caused by a
transfer of value in the transferor’s estate. The distinction is crucial to why
various reliefs and exemptions are statutorily expressed, for example why the
spouse exemption (s.18(1) IHTA 1984) is expressed to be limited to what the
transferee gains in terms of assets or value. HMRC have always proved to be very
keen on drawing the distinction between the business and the assets.
The first question is whether the land with ‘hope value’ qualifies as
‘agricultural property’ for the purposes of s.115(2) of the Inheritance Tax Act
(IHTA) 1984. The problem here is that ‘agricultural value’ is to be calculated
on the value of the land as agricultural land only. It disregards any value
which may be attributable to the hope or prospect of obtaining planning
permission – still less any value attributable to the actual grant of planning
permission. S.115(3) IHTA 1984 provides that the agricultural value of any
‘Shall be taken to be the value which would be the value of the property if
the property were subject to a perpetual covenant prohibiting its use otherwise
than as agricultural property’.
The second question is does the property qualify for Business Property Relief
(BPR)? The full reduction of 100% in the value transferred which, attributable
to the farmland, could be obtained if the value transferred qualified for
‘business property’ relief under s.104 IHTA 1984. ‘Business’ is liberally
defined. However, the business which qualifies for these purposes does not
include the business of ‘making or holding investments’ (s.105(3) IHTA 1984).
If BPR could be made available, it does not matter that a major part of the
market value of the farmland may reflect the hope or prospect of obtaining
planning permission. That hope or market value will attract BPR, for so long as
the land was held in exactly the same way as land which does not attract such
permission, i.e. the land qualifying for APR and BPR must all be farmed in the
BPR will not be available if the farmland is in truth an investment, i.e. it
is tenanted farmland. It matters not for these purposes that the landowner may
indeed be carrying on some form of trade elsewhere, since s.112 IHTA 1984 would
operate to exclude the land held as investment e.g. under a tenancy agreement,
from the exceptions on the grounds that it is an ‘excepted asset’ for these
So under what circumstances would the Capital Taxes Office (CTO) not be
stopped from contending that the hope element farmland was not eligible for BPR?
Well, we have already looked at s.105(3) and s.112. What if the farming business
has been overtaken by an investment business? What about a non-commercial farm?
One case on this subject is that of Farmer and Another (Executors of Farmer
Deceased) v IRC (1999) STC (SCD) 321. The decision has to be made looking at
profits, turnover, the time spent and the value of the assets concerned. These
all help to establish the fundamental nature of the business.
The ability to claim BPR on hope value depends on s.110 IHTA 1984 on the
value of a business for BPR.
S.110 sets out the value of a business as:
(a) The value of a business or of an interest in a business shall be taken to
be its net value.
(b) The net value of a business is the value of the assets used in the
business (including goodwill) reduced by the aggregate amount of any liabilities
incurred for the purposes of the business.
(c) In ascertaining the net value of an interest in a business, no regard
shall be had to assets or liabilities other than those by reference to which the
net value of the entire business would fall to be ascertained.
In “Farmer” farm trade activity exceeded the non-trading activity, e.g. let
cottages. What happens if criteria of trading profits, turnover and time spend
are not met?
The ‘Lifestyle’ Farmer – the non-commercial business
Help with the definition is found in IHTM 25153 ‘Meaning of a business’.
IHTA 1984 s.103(3) excludes a business carried on otherwise than for gain.
IHTM25153 states that many stud farms are carried on otherwise than for gain and
the Tax Inspector should refer cases of doubt via Technical Group TG (IHTM01081)
to Shares Valuation (SV) (IHTM01110) (Livestock) for advice.
In the VAT case Commissioners of Custom & Excise v Lord Fisher (1981) STC 238
at page 245 Gibson identified six indicators, some or all of which should be
satisfied to identify an activity or activities as a business. These indicators
are equally applicable as a test for IHT purposes.
Gibson said a business will exist where the activity:
- Is ‘a serious undertaking earnestly pursued’ or ‘a serious occupation, not
necessarily confined to commercial or profit-making undertakings’.
- Is ‘an occupation or function actively pursued with reasonable or
- Has ‘a certain measure of substance as measured by the quarterly or annual
value of ….supplies made’.
- Was ‘conducted in a regular manner and on sound and recognised business
- Is ‘predominantly concerned with the making of…supplies to consumers with
- And whether those supplies ‘are of kind which subject to differences in
detail, are commonly made by those who speak to profit by them’.
Capturing Development Gains as Income
HMRC do try to assess gains on the sale of development land to income tax and
corporation tax under s.776 ICTA 1988. Clearly this will remove the CGT
advantage of BATR which can reduce the rate of tax to 10% (40% top rate less 75%
Income tax and corporation tax can only be charged on development gains on
farmland if the land is held as the ‘trading stock’ of a land dealer or
developer or, where the land is acquired or developed with the sole or main
object of realising a gain on the disposal of the land or the disposal of the
land when developed (s.776).
Decisions of the Courts such as Tempest Estates Ltd v. Walmsley 1976 STC 10
and Page v. Lowther 1983 STC 61 suggest that, in making any arrangements for the
sale of the land to developers, caution will be needed in ensuring that what is
received is received as capital rather than as the receipts of a land dealer or
developer or as someone who has participated in developing with a view to
sharing the profit on the disposal of the same after development as if this is
the case the profit is caught at 40% income tax rate.
Replacement Property for IHT
Can non-qualification for IHT reliefs be achieved through non-compliance
with the Replacement Property rules?
Agricultural property or the landed estate can provide practical choices for
replacement property. There are real-life situations which can require the
practical use of agricultural property/landed estate, e.g.
- Sheltering development profits in farming/the landed estate.
- Sheltering business gains in farming/the landed estate.
- Sheltering wealth from IHT.
The classic “hope value” shelter is where farmland is sold for development
and the gain is rolled over into an eligible business asset for CGT (thus
sheltering the CGT liability) and potentially sheltering the asset for IHT via
the replacement asset rules but will agricultural property/the landed estate
qualify as replacement property?
It is not uncommon for a successful entrepreneur to turn to agriculture late
in life. The fondness of the English for farming as a pastime is well
documented. Whilst the assets of the entrepreneur remain within his business he
may pass them to the next generation with the benefit of substantial tax relief.
On a successful sale of the entrepreneur’s business he now faces a new problem.
The substantial value which has been protected by BPR is represented by cash
which, unless invested in qualifying property, will be taxed very heavily in the
event of his death without having distributed it among his family and survived
An attractive option for the retired entrepreneur might seem the purchase of
a landed estate including, typically; a home farm in hand, some let farms, and
local facilities such as part of a village. The estate will be run as a
composite whole. The question arises as to how far the entrepreneur has
succeeded in reinvesting into favoured property. Generally APR will be allowable
but problems will arise in relation to those who let properties which are not
occupied for the purpose of agriculture. Depending on the location of the estate
such properties might command a premium value because of their setting. BPR will
not be available on such properties if, taking the estate as a whole, s105(3)
applies to treat it as consisting wholly or mainly of making or holding
investments. BPR could apply to these cottages under s.110 and the case of
Farmer (Farmer’s Executors) v IRC (1999) STC (SCD) 321.
What guidance can be obtained to help explain the problems of the movement of
replacement assets between BPR and APR?
To quote IHTM25303:
‘The Ownership Test: Changes in the nature of the business - For the purposes
of the ownership test (IHTM25301) the nature of the business carried on by (or
on) the business property need not be the same throughout the two year period.
But there must have been a business throughout that period’.
IHTM25312 provides a very useful replacement property chart.
IHTM25313 sets out a limitation of relief for replacement property. There is
an anti-avoidance provision which prevents a business owner from buying a much
more expensive property shortly before death or transfer. Clearly it can be
quite special tax planning to predict the exact date of death…
IHTM25313 however quotes as follows:
‘When the replacement property (IHTM25311) provisions apply, IHTA84/S107 (2)
restricts business relief by providing that the relief shall not exceed what it
would have been had the replacement or any one or more of the replacements not
been made. For this purpose a replacement resulting from the formation,
alteration or dissolution of a partnership, or from the acquisition of a
business by a company controlled by the former owner of the business, is to be
disregarded, IHTA84/S107 (3).
IHTA84/S107 (2) is an anti-avoidance provision and its purpose is to prevent
a person who has qualified for relief from purchasing a much more expensive
property shortly before death or making a transfer.
Your approach to IHTA84/S107 (2) should be practical. If there is any
indication that the deceased’s/transferor’s resources were being rearranged into
considerably more extensive business property to obtain increased relief on the
death/transfer, you should refer the case to Technical Group (IHTM01081).
Otherwise you should adopt a reasonable approach aimed at quantifying and
agreeing the restricted relief in a practical way. The approach you should adopt
is illustrated by two examples: one of which deals with the equivalent
provisions for replacement property in an agricultural relief case (IHTM24136),
and another which involves agricultural and business relief (IHTM24137)’.
Careful planning must be taken with switching replacement assets between
those qualifying for BPR and APR.
The ‘excepted assets’ – future use
HMRC CTO (Capital Taxes Office) is likely to review the balance sheet for
assets which can be excluded from BPR because they are caught under s.112 which
‘In determining for the purposes of this Chapter what part of the value
transferred by a transfer of value is attributed to the value of any relevant
business property so much of the last-mentioned value as is attributed to any
excepted assets within the meaning of subsection (2) below shall be left out of
An asset is an excepted asset in relation to any relevant business property
if it was neither:
(a) used wholly or mainly for the purposes of the business concerned
throughout the whole or the last two years of the relevant period defined in
subsection (5) below, nor
(b) required at the time of the transfer for future use for those purposes’.
Historic examples of assets caught under s.112 are ‘cash mountains’ and
investment assets which do not appear to have a ‘future use’ in the business.
The key to protection are business minutes showing future use and
contemporaneous evidence that such assets will not fail to be eligible for
relief due to the provisions of s. 112.
It is considered that the way forward is a Tax Audit to prepare to deal with
the HMRC scrutiny:
- Analyse the farm or estate within its current structure and business
- Produce a report as to the expected taxation outcome in the event of an
immediate death of various of the parties involved or a potential sale if
- Make suggestions and give reasons for changes intended to maximise the
potential to qualify for APR or, where appropriate, Business Property Relief
- Give pointers for a review of your business to balance the dangers of
ultimate tax pitfalls against the immediate needs of the business and family
- Woodlands must be reported in detail as the tax treatment is complex.
The report should include a full history with maps, areas of potential
development, base costs for capital gains tax, highlighting any areas that might
be used for recreational purposes, e.g. shooting, private home etc.
About the Author
Article supplied by Julie Butler F.C.A. Butler & Co, Bowland House, West
Street, Alresford, Hampshire, SO24 9AT. Tel: 01962 735544. Email;
Julie Butler F.C.A. is the author of Tax Planning for Farm and Land
Diversification ISBN: 0754517691 (1st edition) and ISBN: 0754522180 (2nd
edition) and Equine Tax Planning ISBN: 0406966540. To order a copy call Tottel
Publishing on 01444 416119.
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Article Published/Sorted/Amended on Scopulus 2007-07-21 01:09:14 in Tax Articles