Will the equestrian property qualify for Inheritance Tax Relief
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As part of Inheritance Tax (IHT) planning and compliance, the question has to
be asked as to whether the equine property will qualify for Agricultural
Property Relief (APR) and/or Business Property Relief (BPR)?
Stud Farm is farming for IHT purposes
Stud farms have the advantage over other equestrian activities in that they
do qualify for APR and are not just dependent on BPR for IHT. In order to
qualify for BPR there must be evidence of a business which can of course cause
problems when trying to claim the IHT relief.
The Inspector’s Manual at BIM55701 sets the overview as follows: ‘Stud
farming, which in these paragraphs is taken to mean the occupation of land for
the purpose of breeding thoroughbred horses, is a very expensive and high-risk
activity. In some cases it may be carried on by wealthy individuals essentially
as an adjunct to their racing activities. Nevertheless, for tax purposes it is
treated as farming and thus – by virtue of TA 1988 s 53(1) (ITA2007 s 9(1)) – as
the carrying on of a trade regardless of its commercial viability.’
An important point here is that reference is made to the thoroughbred (TB)
horse but what of the sports horse? The principle should follow provided there
is a genuine stud activity carried on with prospect of profit.
Horseracing, however, is not a taxable activity. Where, as is often the case,
a stud farmer also races horses, considerable care is needed to ensure that the
division between the two activities has been correctly made.
Agricultural Value
The claim for APR will of course be restricted to the agricultural value of
the stud farm.
When reviewing APR claims, an understanding of the definition of agricultural
value is vital. It is limited by Inheritance Tax Act 1984 (IHTA 1984) s 115(3):
‘The value which would be the value of the property if the property was subject
to a perpetual covenant prohibiting its use otherwise than as agricultural
property’. Priority is given to APR under IHTA 1984 s 116(1) before BPR, ie when
property qualifies for both reliefs, APR is given first.
District Valuers (DVs) have been known to argue for a discount of up to
one-third (or more) from market value in determining the agricultural value of a
farmhouse. DVs tend to apply the s 115(3) definition by assuming that the
property was subject to an agricultural tie; however, this is thought to be
unduly restrictive, in that the statute refers to ‘use’ rather than to
agricultural ‘occupation’.
The important point that any tax planner would worry about (as indeed would
their clients) is the fact that the market value of agricultural property might
well exceed its agricultural value and there could, therefore, be a differential
which would be chargeable to IHT over and above the APR claim. It is useful at
this point to look at the scope of the claim for BPR as it may be that the
relief could be claimed against the difference. In order to obtain BPR the
property must be a business not just pure let equine property. Is there hope
value?
Priority of APR
Under IHTA 1984 s 116(1) APR takes precedence over BPR. In the situation
where both of these are available in respect of a single asset, APR is given
first and BPR is given second. This can often happen in the case of a stud farm
left in the estate of a deceased person. If the relevant conditions are
fulfilled, APR will remove from charge the value of the land, valued for
agricultural purposes, and the balance could form a claim for BPR provided the
relevant conditions are satisfied. It is therefore essential to see how and when
BPR can be claimed against part of the stud that does not qualify for APR. The
essential ingredient for a claim for BPR is that there must be a business.
Horse livery – trading status or income from lettings
Is the horse livery activity a business or is it a business excluded from
relief as consisting mainly of making or holding investments s.105(3) IHTA 1984?
There has been a recent case, McCall and Anor (Personal Representatives of
McClean Deceased) v R & C Commrs (2008) SpC 678 7 April 2008 which highlights
the importance of providing additional services to just letting out the land and
buildings. The Special Commissioners did not accept that the grass letting
provided was “akin to hotel accommodation for cattle”.
Trading status will usually apply to a livery where an element of care is
provided by the stable owner, e.g. feeding, mucking-out, putting out to graze,
arranging for veterinary and farriery services, etc. However, this may not be so
sustainable where the stables are merely rented out for DIY livery and where the
horse owner has exclusive use of the stable. There may be a mixture of DIY and
non-DIY activities with trading status being secured on the basis that both
activities will usually also involve a supply of feed to the stable owner (by
the fact that the horse will be put out to graze in any event). It will,
therefore, be necessary to consider each case on its own facts. BPR should be
available provided that the stable rent is not the main activity. The businesses
of riding schools and horse trekking will be assessable as trading income and
therefore should be eligible for BPR.
VAT Advantage
Livery yards obtained a potential boost when VAT charged to clients with
minimum service (Business Brief 21/2001) was deemed to be an exempt supply.
However, such advantage comes with the downside of the ‘exempt’ supply – not
being able to claim back input VAT and the possible complexities of partial
exemption. Problems can arise in deciding whether schooling and “breaking in”
are provided. If the yard is mainly a specialist breaking yard, then any supply
relating to breaking in will be standard-rated. On the other hand, if the main
purpose of the yard is livery, with schooling or breaking as an add-on, then the
entire supply will be exempt. Where a horse is sent to a yard that has the
specific purpose of breaking in or schooling the horse, rather than as somewhere
to keep the horse, then the supply will be standard-rated. Provision of grazing
is zero rated (as food) – if there is a significant degree of care then VAT is
standard rated. Horse liveries are not farming, and business should be separate
from farming in the accounts and tax computation. The advantage of the complete
horse livery service (as opposed to DIY) is that it is a business for tax
purposes and full BPR should be achieved. It will be difficult to argue that BPR
applies to business assets which are subject to exempt VAT registration.
Full livery is where the livery provider is responsible for the complete care
of the horse. The owner will come and go and the livery provider should act in
accordance with the owner’s wishes, but will be fully responsible for the full
care of the horse. Full livery will be a trade, and the trade will hopefully
have the advantage of BPR. However, the provision of DIY livery is not always a
trade.
Finding out that their DIY livery operation is not trading income can be a
shock for many landowners and farmers. It can also be a shock if it helps
disallow BPR. The VAT complexities on the supply of land are a clear example of
how all tax planning surrounding farms and lands has to be comprehensive and
looked at in the round. Short term VAT advantages should not be taken to the
detriment of IHT planning.
Polo
The sport of polo has recently been brought into the equine tax lime light
through a VAT tribunal case (see below). The letting of sports facilities and
sporting rights is normally standard-rated. An example of sporting rights is the
right to take game which is standard-rated. However, there are debates over the
element of land supplied with the facility and the split between exempt and
standard-rated. There are special rules for the use of sports facilities where
there are lets in excess of 24 hours or for the hire of facilities to the same
user for a regular series of events (both then become eligible for exemption but
can be opted). It is more difficult to claim BPR where there is an exempt
supply.
The Letting of sports Facilities
Within the definition of sports facilities HMRC includes swimming pools,
tennis courts and croquet lawns and areas of land that have been specifically
designed or adapted for sporting activities. However, if the sporting facilities
are let for non-sporting purposes then the exemption will apply. An example of
this will be the letting of a swimming pool for a fashion shoot.
Allowing access to recreational and sports activities is usually
standard-rated, but there is a provision that exempts the supply in respect of a
series of lettings, subject to tight criteria. One of these conditions is that
each particular letting must not be less than one day apart. Clearly where VAT
leads so does business status and therefore BPR. As mentioned earlier, if the
underlying activity on the equine property is an exempt supply then there is
every chance that BPR will be jeopardised.
Polo Farm VAT Tribunal
A recent VAT tribunal case, Polo Farm Sports Club VTD20105, has highlighted
the fact that the whole area of VAT, the supply of land, the supply of sports
facilities and horse liveries could benefit from clarification by HMRC. This
could also impact on contemporaneous information to support a BPR claim.
It suited the Polo Farm Sports Club to make standard-rated supplies. It had
not opted to tax the land in question. A dispute therefore arose with HMRC,
which said the Club was making a series of lettings which should therefore be
exempt. In this case the lettings were daily for several hours each day and
there was never a whole day between each letting. HMRC argued that this was
nonetheless sufficient to fulfill the exemption criteria, since there was still
‘a day’ between each letting. But the tribunal preferred the appellant’s view
which was that there had to be at least a clear day, or 24 hour period, in order
for the rule to apply. The Polo Club won this case and achieved their
standard-rated supply, this should also enhance the BPR claim on the polo
property but a lot will depend on the activity surrounding the letting.
BPR – the importance of Arnander
In practice the stud 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 when BPR will be needed
as well as APR.
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.
In looking at any future APR/BPR claim on the equine property the use of the
outbuildings will be important.
BPR – The Importance of ‘George’ – additional services or facilities
One case IRC v George (Executors of Stedman) [2003] EWCA Civ 1763 [2004] STC
147 went to the Court of Appeal and is now the authority by which the other
cases might be read. In common with many other cases, George concerned a caravan
site on which several activities were conducted: these included a residential
park of caravans owned by their residents on which site fees were paid and
profits made from the supply of utilities; a club and bar open to all; storage
facilities for touring caravans; an administration office; let property;
agricultural grazing land subject to licences; commissions from an insurance
agency and from sales of caravans. It had been a feature of previous cases that
services provided in connection with any lease or licence were part of letting
and hence an investment activity. It was an important finding of the Court of
Appeal in George that the characterisation of additional services or facilities
depended upon the nature and purpose of the activity. The equine business must
show service to help the BPR claim and a lot of the utilities provided in
“George” are similar to those in a riding school.
BPR – The importance of Farmer (Farmer’s Executors) v IRC
The case of Farmer (Farmer’s Executors) v IRC [1999] STC (SCD) 321 is worth
looking at for integrated farming and equestrian. The case is considered to be
very helpful to the diversifying stud owner. It highlights sections of the Taxes
Act and other cases that are relevant to the important interpretation of IHTA
1984 s.110 the net value of the business.
The judgements in Farmer and George have important implications for the
majority of family equine businesses. Both judgements emphasise that it is
possible to secure valuable BPR on let property.
There is no doubt that currently the letting out of property is one of the
most efficient uses of assets available to the landowner and farmer. However, as
with all areas of diversification, the tax efficiency and implications must be
fully considered. The short-term income advantages must not be taken without
fully protecting the IHT audit.
BPR - The riding school
Riding schools generally offer a wide range of equine-related activities and
training, including lessons at all levels, holiday accommodation, trekking and
hacking, show jumping tuition, dressage, etc. They may also offer ancillary
facilities such as an all-weather or indoor sand school, full, part or DIY
livery, holiday accommodation and tack and equine supplies. Reference has
already been made to the case of George. Some riding schools are small-scale and
offer only basic facilities, whilst, at the other extreme, some may have a whole
team of British Horse Society (BHS)-qualified instructors and quality
horses/ponies. Once the VAT registration limit has been exceeded, however, the
VAT registered business will often have to charge VAT inclusive prices roughly
equal to its non-registered competitors. This means that margins are often
reduced, with the effect that larger organisations often have a lower gross
profit than smaller ones. Apart from the relatively few cases where a customer
is VAT registered and can recover the extra, prices have to remain competitive.
BPR - Horse tourism, trekking and riding holidays
This activity is not farming nor is it agriculture but it is a useful
diversification activity for farming. The equestrian industry is now a major
economic factor in many rural areas. No comprehensive survey of the sector is
undertaken, so reliable statistics are not easy to find. Thus there are many
opportunities to offer equine recreational facilities – both to those who do not
own a horse of their own, and also to those who can provide their own mount.
The range of establishments offering riding holidays is large. Details are
available from the British Horse Society (www.bhs.org.uk). This can be an
additional attraction of the “Furnished Holiday Let” market, and a
diversification activity.
Many farms offering bed and breakfast or cottage accommodation will also have
suitable buildings to accommodate owner’s horses. In locations with good riding
facilities this can be a strong selling point and higher charges can be made.
Customers will expect certain minimum standards in any horse accommodation (see
Bridle Riders Ltd at www.bridlerides.co.uk). As a comparison to McClean they do
provide “hotel accommodation” for the horses.
Summary
Equine IHT planning is complex. No one equine property or the involvement of
the proprietor(s) is the same. The definition of and difference between
providing DIY liveries and providing “hotel accommodation” for the horse is
complex and the VAT legislation does not help in provision of guide to the
difference between a trade and the supply of a space to keep a horse. Has the
recent case of McClean given guidance? What this case has shown is that where
the equine business involves letting it is imperative to look to the degree of
service provided.
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;
j.butler@butler-co.co.uk, Website;
www.butler-co.co.uk
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. The third edition of Tax Planning For Farm and Land
Diversification is currently being written and will be published shortly.
To order a copy call Tottel Publishing on 01444 416119.
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Article Published/Sorted/Amended on Scopulus 2008-08-04 14:40:32 in Tax Articles
