BM Rural Outlook - Flipbook - Page 19
16 | Rural Outlook Issue 21
Estate Management | 17
Standing up
to HMRC
Elephant poaching is on the rise - so find yourself a
good gamekeeper.
Chipping away at the
main residence
Tips to stay one step
ahead of HMRC
With the Government stepping up
its ‘elephant poaching’ attacks on
agricultural tax reliefs, a strong, wellinformed and professional response
can save tens of thousands of pounds
in liabilities.
Full relief from Capital Gains Tax (CGT)
is given on the main or private residence
when it is sold, with issues starting to
arise on larger houses or properties
with more extensive grounds.
1. Assess the likely tax arising on
future transactions carefully
and in good time
Both Agricultural Property Relief (APR)
from Inheritance Tax and Private
Residence Relief (PRR) from Capital
Gains Tax are coming under pressure
from increasingly zealous staff at
HMRC, while Stamp Duty Land Tax
concessions are also under threat.
While the Government continues to dress
the changes up as ‘simplification’, it is
clear to most observers that the ultimate
aim is increasing the tax take. To do that,
it is working harder than ever on bringing
down established ‘elephants’ – a word
that has entered the tax language to refer
to something that is hard to describe but
pretty obvious when you see one. What
became known as ‘the elephant test’ was
used in the past as a pragmatic way to
agree on what constituted a farmhouse –
but not any more.
Farmhouse definition
challenged
Today the farmhouse is under attack,
with the ‘character appropriate’ test
being increasingly argued by HMRC to
suggest that the building is not really a
farmhouse and cannot be used to claim
APR. This can be particularly challenging
in cases where the farmer is in their later
years and has decided to scale back
livestock operations in particular.
To take advantage of APR and benefit
from 100% relief from Inheritance Tax
(IHT), the farmer must remain actively
farming throughout their life. For a claim
to succeed, the deceased must have
owned and occupied the farmhouse for
the two years prior to death, or if let for
agriculture it must have been owned
for seven years.
With even the most obvious and
“appropriate” farmhouses now being
questioned, these cases need to be
robustly defended. A well-presented case
will win, but if the case is weak, options
include expanding the farming business or
making provision for a future tax liability.
In some cases the older generation
may need to move to another dwelling
and rely on their IHT nil rate band
and residential nil rate band (together
amounting to £500,000 each). If the
farmhouse remains their home they
must be actively engaged in the dayto-day management of the farm,
crops and livestock.
Farmland must be farmed
HMRC will also challenge the fact that
the land is still in active agricultural use.
In a recent case involving a 200-acre
grassland farm, the challenge arose
because the client stopped keeping
her own livestock and sold grass keep.
Batcheller Monkhouse was able to
make the case for active management
in what has become a common
scenario centred around how much
field work is necessary to demonstrate
active farming.
Principal Private Residence relief (PPR)
is defined as applying to the dwelling,
gardens and grounds extending to up to
approximately 1.25 acres, but it can apply
to a larger area where the extra land can
be demonstrated to be “required for the
reasonable enjoyment of the dwelling”.
Batcheller Monkhouse has brought
successful challenges in a number
of cases, securing relief from
CGT amounting to several hundred
thousand pounds.
One case that illustrates this issue
concerned a five-bedroomed house in
25 acres of land that was purchased
in May 2000 for £875,000 and sold in
September 2019 for £1.55m.
The first stage was to establish how
much of the 25 acres fell within the
definition of being gardens and ground
required for the reasonable enjoyment of
the main dwelling, a figure that Batcheller
Monkhouse successfully argued at eight
acres plus all the outbuildings.
This did include a pony paddock, but
the remaining 17 acres had been let
to a local farmer and fell outside the
definition. The gain arising on this
farmland was eventually agreed at
£7,000 per acre, resulting in a charge
for CGT of approximately £20,000 as
compared to the original assessment
of over £85,000.
HMRC has farmhouses in its sights
In another case we proved that a lodge
was occupied by a member of staff
contractually required to live there to
perform their housekeeping and security
duties and was therefore part of the main
dwelling. Had we failed, the resulting CGT
would have been £43,000.
Since April 2020, the tax-payer has only
had 30 days to pay the necessary CGT or
make their case for PPR on larger areas.
Batcheller Monkhouse’s concern is that
more and more home owners will find
themselves faced with expensive tax bills
if they are not prepared. Our advice is to
assess the potential liability well before
exchange of contacts.
Challenge to lower stamp duty
The Stamp Duty ‘holiday’ that has helped
revive the residential market is scheduled
to be withdrawn in September 2021,
but the concessionary 5% tax rate on
mixed use property, such as a house
and farmland, remains.
HMRC, though, is increasingly vigorous
in challenging these claims. And it
makes a difference. A house sold with
100 acres of farmland would be subject
to Stamp Duty of £89,500 if it could be
proved to be a mixed user property –
2. Take remedial measures where
necessary to mitigate against
such liability
or £157,500 if not.
As an example, clients of ours purchased
a house with farmland and applied the
5% mixed use rate. HMRC challenged
the tax basis, which in this case was
worth more than £90,000 if the decision
went against the purchaser. Batcheller
Monkhouse, though, was able to prove
that the land was agricultural and not
amenity, and the tax-payer won the
case, but only after several months of
unnecessary anxiety.
Lessons learned
HMRC is routinely challenging what
would previously have been open and
shut cases in the expectation that
tax payers will capitulate and accept
the increased burden. Taking advice
from experts at Batcheller Monkhouse
who have spent many years studying
elephants can help avoid that outcome.
3. Where a challenge is issued,
be prepared to stand firm and
protect the elephant
4. Present arguments robustly.
A well-presented case, with
suitable evidence, is far less
likely to be challenged.
Challenging HMRC
Batcheller Monkhouse won
main residence relief for
• A listed house in landscaped
gardens and grounds extending
to eight acres
• A country house with gardens,
grounds extending to five acres,
extensive outbuildings, a tennis
court, swimming pool and
private orchards
• An eight bedroomed country
house with landscaped parkland
of 20 acres, a 300m long drive
and an entrance lodge occupied
by the housekeeper
Leo Hickish
l.hickish@batchellermonkhouse.com
• A rural dwelling with four acres
of pony paddocks and stables.