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The Arnander Case and the HMRC Attack on the Two Year Rule


Julie Butler - Expert Author

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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 claim fails

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 for APR?

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.
Bowland House,
West Street,
Alresford, Hampshire,
SO24 9AT.

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Article Published/Sorted/Amended on Scopulus 2007-03-31 20:47:11 in Tax Articles

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