As many within the industry turn to diversification as a way of increasing profits, caution must be exercised as to the effect this may have on inheritance estate planning.

It is well known that taxation legislation allows for up to 100% inheritance tax relief on agricultural property, which many believe allows property to be left under the terms of a Will free of any inheritance tax encumbrances. Whilst this still remains the case, the Inland Revenue have recently taken a much narrower approach to the definition of agricultural property.

Unfortunately, there is no set definition, and the Inland Revenue have used many tests in different cases. One, colourfully referred to as the ‘elephant test’, helpfully states that whilst you may not be able to define a farmhouse, you will know one when you see one!

An example of this narrower approach can be seen in the case of Antrobus v Inland Revenue Commissioner (IRC). The IRC conceded that the six bedroom property met the definition of farmhouse, and that Miss Antrobus was ‘a farmer in every sense of the word’ (as opposed to a ‘lifestyle farmer’). However, they did not believe that the size and style of the six bedroom property was in keeping with the 126 acres of land it belonged to. This subsequently led to a 30% reduction in the tax relief available to the estate.

Whilst each case is heard on its unique issues, caution should always be exercised in the following situations:

• If land is being disposed of.
• If a farmhouse has been renovated or extended to a size or style unsuitable to the land that it belongs.
• If the use of the land has been diversified beyond that of agricultural use, and business property relief is not available.

Owners of agricultural property should always be mindful before pursuing diversification or renovating their property of the effect of this potentially costly tax.

For more information please contact Richard Howells on 01792 529 614 or email richard.howells@jcpsolicitors.co.uk