Contract Farming and Inheritance Tax

The economic conditions of the past few years have seen the increase in the popularity of Contract Farming.

Under a contract farming arrangement, the Farmer provides the land, buildings and, in some cases, livestock whilst the Contractor typically provides the labour and the plant and machinery.

The Contractor receives a fee for his services (the Contractor’s First Charge) and possibly a share of any “Divisible Surplus” at the year end.

The advantages for the Farmer are that he can release any capital currently tied up in plant and machinery, can be less “hands on” and, crucially, can retain qualifying status for Agricultural Property Relief.

Sounds perfect but are there any pitfalls? Well, yes, given that agriculture is one of the most complex legislative areas from the perspective of Inheritance Tax (IHT).

Agricultural Property Relief (APR)

S115 IHTA 1984 defines “agricultural property” as agricultural land or pasture … used in connection with the intensive rearing of livestock or fish …  It also includes such cottages, farm buildings and farmhouses, together with the land occupied with them, as are of a character appropriate to the property.

Agricultural property must be “occupied” for the purposes of agriculture.  Whilst this is not generally an issue with regard to farmland (which can be let property and still qualify for APR), the same may not be true with regard to the farmhouse as has been demonstrated by a number of prominent tax cases over the past few years.

S115 (2) IHTA 1984 tells us that APR applies to “farmhouses, together with the land occupied with them, as are of a character appropriate to the property”.  This suggests a two-fold test i.e. occupation and character.  For the purposes of this article, we will just concentrate on occupation.

HMRC will consider a number of criteria in determining if a property is occupied for the purposes of agriculture.

The case of “Arnander, Lloyd and Villiers (Executors of McKenna and another, deceased) v HMRC [2007] established the principle that it is not the status of the occupier of the premises which is the test, it is the purpose of the occupation of the premises

In this landmark case, it was found by the Special Commissioners that the house was not the main dwelling from which the agricultural operations over the land were conducted and managed because the day to day management and all aspects of farm husbandry over the land were solely the responsibility of contractors who were managed by a land agent and not by the landowner who occupied the farmhouse.  The landowner was not therefore occupying the property for the purposes of agriculture.

In HMRC v Hanson [2013] it was held that it is common occupation which is important.  In that case, whilst the farmhouse was owned by a trust such that ownership and occupation were separate, the same person occupied the farmhouse as farmed the surrounding land and so the farmhouse qualified for APR.

So, whilst it should be possible to set up a contract farming arrangement and retain the valuable APR reliefs, the danger is that a badly worded contract agreement could be held to constitute a tenancy, in which case the farmhouse would be occupied in the capacity of landlord and not for the purposes of agriculture.

It is therefore important to ensure that risks are appropriately shared, that the farmer is involved in decision making and that the farmhouse is genuinely the base of the farming business.

If you would like to discuss your personal situation in more detail please contact the Tax team at Wright Vigar on 01522 531341 or email action@wrightvigar.co.uk. A member of the tax team would be delighted to help and advise you.