First-tier Tribunal (Tax)

·       Higginson’s Executors v Inland Revenue Commissioners [2002] STC (SCD) 483

·       LloydsTSB (personal representatives of Antrobus, deceased) v Inland Revenue Commissioners [2002] STC (SDC) 468

·       Rosser v Inland Revenue Commissioners[2003] STC (SCD) 311

·       Arnander and others (executors of McKenna, deceased) v Revenue and Customs Commissioners and related appeal [2006] STC (SCD) 800

·       Starke and another (executors of Brown deceased) v Inland Revenue [1994] STC 295.

·       Dixon v Inland Revenue Commissioners [2002] STC (SCD) 53

The Law

4. Transfer on death

(1) On the death of any person tax shall be charged as if, immediately before his death, he had made a transfer of value and the value transferred by it had been equal to the value of his estate immediately before his death

(2) ………….

Agricultural property

Section 115 Preliminary

(1)        ………..

(2)        In this Chapter “agricultural property” means agricultural land or pasture and includes woodland and any building used in connection with the intensive rearing of livestock or fish if the woodland or building is occupied with agricultural land or pasture and the occupation is ancillary to the agricultural land or pasture; and also includes such cottages, farm buildings and farmhouses, together with the land occupied with them, as are character appropriate to the property

(3)        For the purposes of this Chapter the agricultural value of any agricultural property shall be taken to be the value which would be the value of the property if the property was subject to a perpetual covenant prohibiting its use otherwise than agricultural property …..

116     The Relief

(1)      Where the whole or part of the value transferred by a transfer of value is attributable to the agricultural value of agricultural property, the whole or part of the value transferred shall be treated as reduced by the appropriate percentage, but subject to the following provisions of this Chapter

(2)      The appropriate percentage is 100% if

a.      The interest of the transferor in the property immediately before the transfer carries the right to vacant possession or the right to obtain it within the next twelve months, or

b.     The transferor has been beneficially entitled to that interest since before 10 march 1981 and the conditions set out in subsection 93) below are satisfied……..

Section 117.  Minimum period of occupation or ownership

Subject to the following provisions of this Chapter, section 116 above does not apply to any agricultural property unless-

(a)        it was occupied by the transferor for the purposes of agriculture throughout the period of two years ending with the date of transfer, or

(b)        it was owned by him throughout the period of seven years ending with that date and was throughout that period occupied (by him or another) for the purposes of agriculture.

Section 221 Notices of determination

(1) Where it appears to the Board that a transfer of value has been made or where a claim under this Act is made to the Board in connection with a transfer of value, the Board may give notice in writing to any person who appears to the Board to be the transferor or claimant or to be liable for any tax chargeable on the value transferred, stating that they have determined the matters specified in the notice.

(2) The matters that may be specified in a notice under this section in relation to any transfer of value are all or any of the following-

(a) the date of the transfer;

(b) the value transferred and the value of any property to which the value transferred is wholly or partly attributable;

(c)  the transferor;

(d) the tax chargeable (if any) and the person who is liable for the whole or part of it;

(e)   the amount of any payment made in excess of the tax for which a person is liable and the date from which and the rate at which tax or a repayment of tax overpaid carries interest; and

(f) any other matter that appears to the Board to be relevant for the purposes of the Act.

(3) …….

(4) …….

(5)……..

Preliminary Issues

“the particular point in issue in the present proceedings is whether the deceased’s residence at Blue Gates Farm …constituted ‘agricultural property’ for the purposes of section 115 (2) IHTA 1984 at the relevant time, namely immediately prior to Dennis Golding’s death.  This question in turn breaks down in to two issues (i) whether the house constitutes a “farmhouse” for the purposes of section 115 (2)(ii) in the event that the house constitutes a “farmhouse” as at that time, whether the house was of a “character appropriate to the property….”

Mr Neal said that he had understood that the parties had agreed that the house was a farmhouse and the only issue was whether it was “character appropriate”.  If the Tribunal had now to consider whether the house was a “farmhouse” he was not in a position to litigate the point as he had not prepared his case on that basis. He referred the Tribunal to his firm’s letter of 7 January 2010 which then asked:-

“We would wish to seek clarification of the grounds upon which you have issued the Notice of Determination. Whilst appreciating that you have stated that the deceased’s residence at Blue Gates Farm was not agricultural property, it is not clear from your letter whether the basis of your contention is that the house was not a farmhouse within the meaning of section 115 (2) IHTA 1984 or whether, accepting that it was a farmhouse, it is not character appropriate to the agricultural property occupied with it.

From previous correspondence we understood that the latter is the case but in view of the point now reached and the possibility of the matter proceeding to a hearing before the First-tier Tax tribunal, we wish to be certain of the precise basis on which you have issued the Notice of determination…

HMRC responded on 13 January 2010 in the following terms:-

“ … The basis for the Notice of determination is that the property is not considered to be of a character appropriate….”

5 (1)  Subject to the provisions of the 2007 Act and any other enactment. The Tribunal may regulate its own procedure.

 (2) The Tribunal may give directions in relation to the conduct or disposal of proceedings at any time, including a direction amending, suspending or setting aside an earlier direction

(3) In particular, and without restricting the general powers in paragraphs (1) and (2), the Tribunal may by direction-

……(e)  deal with an issue in the proceedings as a preliminary issue

……(g)  decide the form of any hearing

Rule 2 provides:-

 2 (1) the overriding objective of these Rules is to enable the Tribunal to deal with cases fairly and justly.

(2) dealing with a case fairly and justly includes-

(e)  avoiding delay, so far as compatible with proper consideration of the issues.

7. We have considered the preliminary issue and have decided that it would be inappropriate to adjourn the hearing. Dennis Golding died 4 March 2007 and the Executors need a decision. Two days have been set aside for this hearing and both professional teams and their witnesses are here for the matter to be heard. We have also decided that it is clear from the correspondence above that the only matter in issue is whether the house is “character appropriate”. It has been agreed by both parties, as a result of the correspondence, that the house is a “farmhouse” and we shall deal with the appeal on that basis.

8.  During the proceedings Mr Neal wished to refer the Tribunal to the case of “Executors of Mary Jutta Getham”. Mr Davey pointed out that this was an unreported case and we were told that the case summary had been provided by the solicitors, who appeared in that case. We have decided that Mr Neal may not refer to that case in argument as it has not been properly reported and its veracity is in doubt.

The Facts

9.       Mr Golding gave evidence under oath. Prior to 1940 there was no history of farming in his father’s family. His grandfather worked in Local Government and his grandmother cared for the home. His father, as a young man, had expressed the desire to farm and his father purchased a farm for him in 1940. The farm is much the same as it was in the early days, save that Mr Golding built ‘Brookfield Bungalow’ (where Mr Golding now lives) and which is adjacent to the driveway to the farm. His father farmed for the rest of his life, and his grandfather transferred the farm into his father’s name on 26 January 1965. His father carried out work to the buildings. He modernised the stables and put up corrugated sheds for the farm implements. It has been agreed that the outbuildings, adjacent to the farm are agricultural buildings. His father did not require an elaborate or large dwelling. The farmhouse was simply his home, his office and his workplace, and merely an extension to and an integral part of the land he farmed. He brought up his family who lived off the farm.  His father had acquired 3 further acres of land from the South Staffordshire Water Company, which was conveniently situated close to the farm and gave his father the opportunity to expand his farming operation He told us that his father had some 600 free range chickens; 7 to 10 cattle; harvested fruit off the fruit trees and grew vegetables. The farm produced milk and grew wheat, barley and oats for sale. The farm had a cold room and the apples were stored in the bedroom. During cross-examination Mr Golding conceded that the position changed in the 1980s.  His sister was married in 1985 and moved out of the farmhouse. His mother died in the same year and the lease for the additional 3 acres of land expired and was not renewed.

Year Taxable profit

2003/4   £1,586

2004/5 £1,600

2005/6 £1,532

2006/7 £1,047

Mr Golding conceded that the income from the farm represented at best 25% of his father’s total income. Mr Davey suggested that the receipts represented less than the minimum wage. We are satisfied that the farm income, from the 1990s, was not sufficient for Mr Golding’s father to live off. He did not keep any animals nor provide any hay. He only provided a limited production of eggs from a flock of approximately 70 free range egg laying hens.. We are satisfied, however, that in a very limited way he was still working on the farm when he died. Mr Golding confirmed that his father had carried out some remedial work to the farmhouse, principally re-rendering it. He explained, however, that the roof had been covered, in part, with a tarpaulin and that it was in need of serious repair.

a.      Is the farm appropriate by reference to its size, content and layout of the farm buildings and the 16.29 acres farmed? He considers that it is. The farmhouse has been so used for the last 70 years and the farm buildings are adjacent to the farmhouse.

b.     Is the farm proportionate in size and nature to the requirements of the farming activities? He considered that it was. The agricultural land and buildings have been used for arable, hay, poultry and fruit production in various forms of intensities over a long period of time. The DEFRA statistics demonstrate a good number of similar size holdings being used as agricultural units.

c.      “One knows one when one sees it”- otherwise known as the elephant test. Effectively this is a gut reaction test as to whether or not someone would reasonably see something as being character appropriate. When he looked at the physical  features of the farmhouse, the farm buildings and the farm, the listing definitions and the particular history, it is clear that the house was historically part and parcel of the land.

d.     The farm as seen by a countryman; This is the informed opinion of a reasonable person with rural knowledge (i.e.) would the educated rural layman regard the house as a farmhouse with land which would be character appropriate? The point here, is does the land dominate the house or vice versa. His view was that the land dominates the house within the context of the physical factors of the farm buildings and the land surrounding the farmhouse.

e.      The factual historic evidence is clear, simple and overwhelming. This is an agricultural holding and has been for upwards of 70 years.

Mr Beer did not produce any examples of other farms of a similar size as he chose to rely on the historical listing of the farm, which revealed that the farm had originally been built in the 1700s and he set out details of its construction.

House £290,000

Land £67,000

Buildings £60,000 total £417,000

He considered that a three-bedroom detached property occupied with 16.29 acres with a limited range of old buildings was not suited to modern farming practices. He did not consider that it was appropriate to require a dwelling house to be present in order to farm the land. He produced details of 6 comparable farms the bulk of which had been sold by auction. It would appear that only the first farm on the list was of a comparable size being 18.64 acres. The others appear to range from 56 acres to 405 acres, which we do not consider to be comparables even though some of the sales had broken up the farm and the agricultural land as separate lots. Mr Coster concluded that in the case of small areas of land the market did not consider it necessary to retain the house in the same ownership because the land could be sold separately.

a.       Specialist Poultry farms £100,600

b.       Mixed farms £  27,300

c.       All farm types £  34,400

At no time during the seven financial years from 2003/4 to 2009/10 did the average net income fall below £23,900, which is over 9 times the Blue Gates Farm average income, before the deduction of cost. Mr Beer had suggested that the farm could be used for intensive poultry farming. The British Free Range Egg Producers association in their costings give the standard flock of 12,000 birds capable of being run by one unit of labour. He produced details of four poultry farms in the West Midlands or Northamptonshire. These revealed acreages of 3.57 to 29.27 sufficient to service from 12,000 to 160,000 birds. They each appear to have been serviced by 3 bedroom properties. Three of the houses were constructed under Agricultural Occupancy Condition planning consents. The 70 hens kept by the deceased represent less than 1% of a commercial bird free range egg unit. Even with 700-800 birds the farm only amount to 5.8 to 6.7% of the commercial market. Mr Coster also demonstrated that the amount of work required on the farm could only amount to 4% of the annual labour requirements of about 11 working days out of 275 days. For all the above reasons Mr Coster considered that the level of activity being conducted on the subject land did not give rise to a functional requirement for a dwelling house to serve the farming of that land.

Submissions

“..to facilitate the continuance of farming after the death of the farmer”

It is not intended to provide a windfall for the beneficiaries, but rather to stop the braking up of a farming business. There have been a large number of cases some of which have dealt with very large properties. This case is not that type of case. Each case is fact specific. The property in this case is small, as is the acreage.  The farming activity was minimal and not commercial. The question is whether the farming business requires the house?  The farm had been a working farm up to 1970. Thereafter the farming activity had declined and by 1996 Mr Golding was living alone in the house. There was no farm shop. Over a 3 to 4 week period there were approximately15 customers, served at the farm gate. The farm was making little money and he was living off his inheritances and savings. There was, in fact, no evidence of a farming business at the date of Mr Golding’s death.  Mr Beer has suggested that a purchase would see the potential of buying the farm to use it for egg production. He submitted that the proposal was not realistic. Mr Beer’s budget had not included for the substantial capital costs of constructing the sheds and repairing the house. Nor had he factored in any labour costs. Mr Coster had advised that it was unlikely that planning permission would be granted for the activity given the unlikelihood of it being commercially viable. Even if the suggestion for poultry farming was viable there would have been no need for the house as the egg production could function from the land and the existing farm buildings. Mr Coster had produced a substantial amount of evidence provided by DEFRA to show that the farm could not be profitable.

“…. In my view its not appropriate to compile an exclusive list of relevant factors which are to be considered in considering whether a farmhouse is of a character appropriate to agricultural land. The question is one of fact and degree and any factor could be relevant. No one factor is determinative but relevant factors in this appeal are; the historical associations; the size, content and layout of the house; the farm outbuildings; the area being farmed and whether the house is proportionate to the land being farmed; the view of the educated rural layman; and the relationship between the value of the house and the profitability of the land”.

23. In Starke and another (executors of Brown deceased) v Inland Revenue [1994] STC 295 the property consisted of a substantial 6 bedroom farmhouse and an assortment of farm buildings with 2.5 acres of land attached. It was held that the farmhouse and land could not be characterised as agricultural land and pasture. In Dixon v Inland Revenue Commissioners [2002] STC (SCD) 53 it was held that the cottage was not a ‘character appropriate’ to agricultural land or pasture but rather the converse; the orchard and garden were of a character appropriate to a cottage which was a private residence in a rural area. The case makes it clear that there has to be some agricultural land with the farmhouse to enable the latter to be ‘character appropriate’.

24 In Lloyds TSB (personal representatives of Antrobus, deceased) v Inland Revenue Commissioners [2002] STC (SDC) 468, as in this appeal, the parties had agreed that the house was a ‘farmhouse’. Although the farmhouse was a substantial country house and listed building it was decided that it was ‘character appropriate’ for the 126 acres of land farmed with it. Interestingly the business had made losses in 1987, 1989, 1990, 1991 and 1992 and subsequently from 1995 to 2001, latterly the losses had been substantial. In paragraph 55 again Dr Brice said-

55. The second question is whether the farmhouse is proportionate in size and nature to the requirements of the farming activities conducted on the agricultural land or pasture in question. Here the relevant facts are: that the dwelling house is agreed to be a farmhouse; that it has been a farmhouse for the particular holding of agricultural land and pasture in question for almost 100 years; that it has been occupied, and farmed by, the same family for that period. Those facts speak for themselves. One has to accept that, in her later years, Miss Antobus’s farming business was not financially successful but she was personally involved in the farming business.

When considering the profitability of the venture Dr Brice went onto say-

‘It is accepted that the evidence about the comparables did not extend to the profitability of the farming activities but, in my view, profitability cannot be a conclusive factor’

25     Of the comparable provide by Mr Coster numbers 7, 8, 9 and 10 were the closest to Blue Gates Farm. He has, however, relied on a functional test (see paragraph 6.3 of his opinion):-

“However, I consider that the level of farming activity and the functional requirement or otherwise it generates for a dwelling house is relevant”.

This view has and no doubt encouraged by HMRC’s Manuals/Inheritance Tax Manual /24000 which reads :-

“The test is therefore essentially a functional one”.

“The approach adopted for the application of these principals [(sic) those suggested by Dr N Brice above] is that no principal is decisive, the principles are considered to be in the round and judgement is based on the broad picture”.

All matters needed to be considered in the round. Relying on the lack of profit and farming activity is not appropriate where the farm as been worked, however little, by the deceased. Dr Brice’s tests set out above in Lloyds TSB (personal representatives of Antrobus, deceased) v Inland Revenue Commissioners [2002] STC (SDC) 468 at paragraph 102 are to be preferred, the question is one of fact and degree and any factor could be relevant. In all the circumstances Mr Neal submitted that as the house is a farmhouse and the deceased was farming the land, whilst living in the farmhouse, up to the date of his death the farmhouse must be ‘character appropriate’ in relation to the land and the appeal should be allowed and the determination dismissed.

The decision

TRIBUNAL JUDGE

RELEASE DATE: 18 May 2011