The Threat to Inheritance Tax Exemption on Grazing Land
Posted: Thursday 25 February 2010
The Agriculture and Rural Property team came across a case recently which highlighted the need to take care over the management of land that may have development value. This was the 2008 Northern Irish case of McCall v Special Commissioners. As you may know owners of agricultural land occupied by third parties on agreements can benefit from 100% Agricultural Property Relief ("APR") on the agricultural value of the land, with any value over this figure being taxed. Where land is farmed in-hand as a business then Business Property Relief ("BPR") can provide 50% or 100% relief on any enhanced value.
This case involved 33 acres let under a conacre agreement. This is where a landowner only lets the land during the grazing period and does not grant exclusive possession. The question in determining whether APR applies is whether the business activities of the landowner in maintaining the land are enough to prevent the land being considered as wholly or mainly investment making.
In McCall this was held not to be the case as the landowner’s representative spent less than 100 hours per year on the management. The essence of the arrangement was to allow the grazier to use the land for payment. It was not used to create a product or provide a service distinct from use of the land, i.e. the land was not used to make a living on it, but to make a living from it. BPR was denied and the estate was taxed on the value in excess of agricultural value, which was more than £5.6 million (the agricultural value was £165k).
In practice the decision is likely to make little difference to the day to day management of estates, as a small amount of investment activity does not prevent a business qualifying for BPR. However, where all of the land owned is let on these types of agreement, and there is value over and above agricultural value, there is now a much greater risk of that enhanced value being taxed. We would expect in the majority of lettings of this type the maintenance activity of the landowner is likely to be insufficient to prevent the land from being considered an investment. In such cases a more active role needs to be taken.
