Clampdown on farmhouse values

Investing in assets that escape inheritance tax has long been seen as the simplest way to outwit the taxman. But buying a farm, one way to skirt around IHT, is no longer the obvious option, following a recent court win for HM Revenue and Customs.

Land Tribunal judges decided in a test case that farmers’ inheritance tax relief will only cover the agricultural value of a farmhouse and not its market value, which is usually far higher, meaning 40 per cent tax is levied on the difference.

In the case, brought by the heirs of Warwickshire farmer Rosemary Antrobus, the tax bill leapt by £73,600 as a result of the ruling.

“Buying a farm has always been seen as a good investment prospect. As well as providing people with a home and a potentially respectable investment, it also gives people IHT relief on those assets,” said Mark Balfour, partner at accountants Larking Gowen.

“But the Land Tribunal case is likely to encourage the Revenue to go after certain farms for IHT. The Revenue has been pushing very strongly for a clampdown in this area and this case could give it the backing that it has been looking for,” he says.

Currently IHT relief on agricultural land and property is available to anyone who buys a farm. Even for those that do not farm the land themselves – as long as it’s let for farming purposes and they get vacant possession within 24 months – IHT relief will apply.

As property prices have risen the Revenue has started to look closely at farmhouses and has applied a number of tests to decide whether it is an appropriate house for the farm.

“I’m not surprised that they are interested in this area; it has provided a lot of good investment opportunities and a lot of people have taken advantage of the rules,” says Balfour.

Investment returns from high-performance arable land averaged 7.3 per cent a year in the 10 years to December 2004, according to Savills Private Finance.

Mark Ashbridge, head of agricultural finance at Savills Private Finance, says: “If you’re a wealthy businessman and have £10m of assets then you could buy a £5m farm and farm it for two years and, as long as you structure it correctly, you get the reliefs.”

Investors may now be put off by the Land Tribunal decision against the Antrobus case, in which it was ruled that the agricultural value of the house was 30 per cent below the market price.

Although land and farm buildings will still be eligible for IHT relief, it was made clear that the farmhouse should only qualify if the owner or their spouse farms the land on a “day-to-day basis”, or used to before retirement.

Lifestyle farmers, those who leave the day-to-day running to a contract farmer and those who have scaled down their activity, are also affected, according to Alastair Murdie, tax and trust partner at law firm Payne Hicks Beach.

“Although the land will still be eligible for IHT relief, the property will not, unless the owners are actually farming the land themselves,” he says.

Ryan Emmett, at the Royal Institute of Chartered Surveyors, says: “Farmland has been going up in value over the last 10 years and we expect that to continue. Prices started to come off slightly this year as property values cooled but we don’t expect it to dip too much after this ruling.”

Accountants fear that Gordon Brown and the Revenue are planning a joint assault that will close the door to many planning opportunities. Analysis of UK inheritance tax by Grant Thornton and Lombard Street Research has found that if assets increase in line with average long-term asset price inflation, the number of estates above the IHT threshold will rise to 3.6m by 2009, up 1.5m on 2002 figures. Mike Warburton, senior tax partner at Grant Thornton, says: “Clamping down on IHT relief is an easy way for the government to increase its tax take.”

There is still one way people can avoid IHT on assets. “It is possible to invest in heritage assets such as a stately home or works of art, and leave them on public display in your will,” says Warburton.