The Arnander Case and the HMRC Attack on the Two Year Rule
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Originally Published 31st March 2007
The two year test
One of the most frequent areas of attack by HMRC against a claim for
inheritance tax relief (IHT) is whether or not the agricultural property has
been occupied for the purposes of agriculture for the two years prior to death.
The recent “Arnander” case was not just about the farmhouse. In deciding
whether Rosteague House was a farmhouse for the purposes of agricultural
property relief (APR), Dr A N Brice (Special Commissioner), states “that
Rosteague House was not occupied for the purposes of agriculture throughout the
period of two years ending with the relevant dates of death within the meaning
of section 117(a)”.
The emphasis of the two year occupation rule
Whilst the Arnander case (C J Farnander, D T M Lloyd and M M Villiers
Executors of David McKenna deceased v HMRC (2006) SpC 565) adds to the legal
principals established in a string of previous IHT authorities which have looked
at APR and the farmhouses, a significant point is that the Commissioner
determined that the farmhouse and certain outbuildings had not been occupied for
the purposes of agriculture throughout the period of two years ending with the
relevant dates of death within the meaning of section 117(a).
Practitioners are finding that more and more emphasis is placed on the two
year rule by HMRC. Has the property been occupied for the purpose of
agriculture in two years prior to transfer?
The big problem in achieving the APR appears to be where there is a reduction
of physical presence by the owner through old age or infirmity. Although the
occupation requirement of s117 does not require physical presence, there are
problems where there is an absence for more than a minimal period. The key to a
successful claim for relief is being able to show evidence of the taxpayer
engaging in the farming matters. It could be argued that the ‘physical presence’
can be evidenced and demonstrated with greater ease with regard to the farmland
and buildings than the farmhouse through contract farming arrangements which
involve genuine decision making and input by the landowner.
The outbuildings – the burden of proof of “for the purposes of agriculture”
In practice the outbuildings often have a high probate value and therefore a
high potential IHT liability. There is often scope for planning permission and
some form of development of the buildings
The Arnander case also placed focus on the outbuildings. For the Appellants
Mr Massey argued that all the outbuildings were occupied for the purposes of
agriculture as they were used or kept ready for use predominantly for the
purposes of the storage of farm machinery and utilities His argument was that
they were not used for any non agricultural purposes
For HMRC Mr Karas accepted that the Dutch barn (building area 1) and the
grain silo (building area 9) were used for the purposes of agriculture. The
Dutch barn and grain silo passed the test, but what of the others?
It was stated that “the burden of proof in these appeals is on the Appellants
to show that the outbuildings were used for the purposes of agriculture
throughout the period from 2001 to 2003” and that “the Appellants have not
discharged the burden of proving that these buildings were used for the purposes
of agriculture for the two years prior to the dates of death”.
So what were the outbuildings in Arnander?
What were the outbuildings? Which of these outbuildings were disallowed APR
on the basis of not being used for the purpose of agriculture?
1. Dutch barn - Allowed
2. A Dung stead - Disallowed
3. Informal tack room - Disallowed
4. Horse stabling - Disallowed
5. Storage for seasoned timber for rent - Disallowed
6. Storage–field troughs, gates, fencing stakes - Disallowed
7. Storage-creosote, hand tools, farm tools - Disallowed
8. Storage-cement and blocks for construction - Disallowed
9. Grain silo - Allowed
10. Storage of agricultural machinery - Allowed
11. No evidence - Disallowed
For the purposes of agriculture
What was Dr A N Brice’s conclusion and reasoning with regard to the above?
She stated, “my conclusion on the fourth issue in the appeal is that the farm
outbuildings numbered 1, 9 and 10 were occupied for the purposes of agriculture
throughout the period of two years ending with the relevant date of death within
the meaning of section 117(a) but that the farm outbuildings numbered 2, 3, 4,
5, 6, 7, 8 and 11 were not occupied for the purposes of agriculture throughout
the period of two years ending with the relevant date of death within the
meaning of section 117(a)”.
Dr Brice considered that the two year rule decision applied to the farmhouse
“that Rosteague House was not occupied for the purposes of agriculture
throughout the period of two years ending with the relevant date s of death
within the meaning of section 117(a)” and to the outbuildings
What is to be learnt here? It can be argued that this again emphasises that
horse liveries are not agricultural (s115(2) IHTA 1984). Would there be
evidence in place to support the claim for Business Property Relief (BPR) on
outbuildings 2, 3, 4, 5, 6, 7, 8 and 11? The BPR position was not discussed in
Arnander but the adviser must be prepared for the claim for BPR where the APR
The tax adviser and the two year rule
For the tax adviser in the panic that the agricultural world is making over
the farmhouse and the potential loss of IHT relief, is the two year rule being
overlooked? Will there be more agricultural tax relief casualties i.e. IHT
relief disallowed and not just on a few agricultural buildings?
Are former agricultural buildings (buildings whose purpose was agriculture
but is no longer) capable of failing in the claim for APR? Will BPR under IHTA
1984, s 110 need to be called upon and will the BPR claim succeed?
Practical questions from HMRC
Probate practitioners are receiving numerous questions over what agricultural
activity had actually been taking place in the last two years before their
client’s death. Not just the history of agricultural activity. Questions are
being raised over proof of what was happening. The approach can not be “well
she was farming it fifty years ago so obviously she is farming it now ”
Historical documentation helps to give background and insight but it does not
override the need to satisfy IHTA 1984, s 117(a). There are many farmers who
will not just lose APR on the farmhouse, but might lose the eligibility to APR
on farmland and buildings So what type of arguments are HMRC presenting in
their attempts to disallow the relief?
Barter – the burden of proof
Many rural farming communities survive and thrive on the principle of
‘barter’, undocumented agricultural exchange of services and produce. For
example the haymaker will swap bales of hay in return for cutting, turning and
bailing. The hedge cutter will trim the hedges in return for grazing a few
cattle, or for taking some calves to fatten. The end result can be a set of
farm accounts showing little activity.
The machinery might belong to the deceased e.g. the hedge trimmer, the bailer
and the tractor but are just used by the contractor. So where is the burden of
proof? Clearly the answer is to record and document barter as part of the
contemporaneous accounting records The farming family should also take
photographic evidence of the machinery being used on the fields also being
stored in the barns and outbuildings in anticipation of questions that might
arise in future claims for IHT relief's
Contract farming is real farming – genuine commercial risk
Many farmers engage in contract farming arrangements through a combination of
economic necessity, commercial reality and failing physical health. If the
agreement does not require any real input from the landowner e.g. repairs, seeds
and fertilizers, use of machinery how can buildings be justified as qualifying
Practical suggestions are to retain a mix of ‘real’ farming e.g. suckler
herd, separate grazing agreement where landowner responsible for hedges,
ditches, mowing, fertilizer and spraying. Another alternative is to ensure that
the contract farming agreement requires real physical input and genuine
commercial risk and there is no “guaranteed” income.
In “Arnander” the contractor claimed the farm subsidy payments and the
landowner received quarterly payments which could be argued are weak factors
Grazing agreements must be documented
Grazing arrangements are the trade of farming (real farming!) provided that
the landowner as mentioned above, deals with all the maintenance of hedges,
ditches and grass, but if they are not in writing, where is the documentation to
say that there is not just let land. Where is the burden of proof? The
practical action for the farmers and their advisers has to be to sort out those
grazing agreements now!
The deciding years – An IHT audit
An IHT audit should ideally be carried out on the farm property to check the
availability of future IHT reliefs and what rescue work can be undertaken in
order to protect future relief.
Will the assets comply with IHTA 1984, s 117(a) of being occupied for the
purposes of agriculture for the two years prior to death?
Would the assets qualify as agricultural property under s115(2) –
“agricultural land or pasture…and also includes such cottages, farm buildings
and farmhouses, together with the land occupied with them as are of a character
appropriate to the property”.
If the assets failed to achieve APR would BPR be achieved on the other assets
IHTA 1984, s 110. Would the 1999 case of “Farmer” apply? (Farmer and Another
(Executors of Farmer deceased) v IRC (1999) STC SSCD 321 SpC 216).
Does the contract farming arrangement need review? Does clear evidence of
activity need to be documented?
In Arnander the special commissioner made emphasis of the two year rule.
What is history and memories if s 117(a) cannot be satisfied? Are family
members and tax advisers placing enough importance on the purpose of agriculture
in the last two years? If the agricultural use fails is there enough evidence
of the business activity to support the BPR if APR fails?
Are the long standing farming families being too complacent? Is the tax
adviser placing sufficient emphasis on the problem? Is the fuss over tax relief
on the farmhouse masking the vulnerability of future basic relief's for APR and
BPR on buildings etc? Are these concerns placing too much emphasis on what it
looks like and not on its occupation?
About the Author
Butler & Co specialise in the
farming and equine industries, focusing on preparation of accurate, detailed
accounts combined with expert tax advice and planning, particularly in the
fields of Inheritance Tax and Capital Gains Tax.
Julie Butler FCA can be contacted by Tel: 01962 735544 or Email;
Butler & Co.
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Article Published/Sorted/Amended on Scopulus 2007-03-31 20:47:11 in Tax Articles