HM Revenue and Customs (HMRC) are well known for applying the letter of the law when it suits them and, with the Government seeking to reduce the massive fiscal deficit, are pursuing some cases that seem to stretch the limits of reason.
In a recent case, HMRC argued that Agricultural Property Relief (APR) for Inheritance Tax (IHT) did not apply to a bungalow owned by a man who had been a member of a farming partnership almost his whole adult life. The property was let to the partnership and the man remained a partner and participated in decision-making until he died. He continued to live in the bungalow until four years before his death, when his health made it necessary for him to move to a care home.
APR operates, in effect, to reduce the value of ‘qualifying agricultural assets’ (which in most circumstances include farm cottages) to nil for IHT purposes. HMRC’s argument that the bungalow did not qualify for APR was founded, in effect, on the fact that the man had lived in the care home for four years prior to his death and the council had been advised it was unoccupied, so rates would not be payable. The property remained empty save for the man’s possessions, but was visited periodically by him and by other members of the farming partnership of which he was a member. In HMRC’s view, this meant that neither of the criteria which permit APR to be granted were met, specifically:
- that the property must be occupied by the transferor for the purposes of agriculture throughout the period of two years ending with the death; or
- that it was owned by the transferor throughout the period of seven years ending on that date and was throughout that period occupied (by him or another) for the purposes of agriculture (Inheritance Tax Act 1984, Section 117).
The ownership of the bungalow was not disputed. The Court had little hesitation in ruling that the property was occupied for agricultural purposes for the required period and occupied by the transferor for agricultural purposes.
This is an example of a case that was probably a poor choice for HMRC to contest, but it does illustrate the point that the tax authorities will take up the cudgels in some cases even when common sense dictates the weakness of their arguments. In this case, had the man not been able to participate in the partnership or had there not been a lease in favour of the partnership, HMRC would have been on stronger ground. Also, had the bungalow been let to someone other than an agricultural worker, the claim for APR may well have failed.
The lesson to be learned is to be careful and take advice on the potential implications of your actions. HMRC were given leave to appeal by the Court, so we might not yet have heard the last of the matter.