Section 9: agricultural property
The Valuation Office Agency's (VOA) technical manual relating to Inheritance聽Tax.
9.0 Scope of section
Part 1 of this Section deals with matters affecting the valuation for IHT purposes of agricultural properties generally. Part 2 deals with the operation of relief for agricultural property which may be available in certain circumstances in respect of transfers of value in life or on death.
Further assistance on specific technical agricultural matters is available from the聽SVT聽Policy and Professional Team.
9.1 General
For IHT purposes 鈥渁gricultural property鈥� as defined in s.115(2) IHTA 1984 (see Part 2) is distinguished from other types of property in the following instances only:-
- when applying agricultural relief, under ss.115-124B IHTA 1984 (see Part 2);
- in excluding the granting of business relief in respect of the agricultural value of agricultural property which qualifies for agricultural relief - see Part 2 and Section 11;
- in excluding from woodland relief any woodlands which are 鈥渁gricultural property鈥� (s.125(1) IHTA 1984) (see Section 10);
- in connection with the specific provisions of s.169(1) IHTA 1984 for the valuation of farm cottages - see para 9.18 below.
9.2 General
Valuations will be subject to the normal Revenue hypothesis on open market value (see Section 7).
The question of prudent lotting is often of particular significance when dealing with agricultural properties
9.3 Prudent lotting and sporting rights
Where the prudent lotting of an agricultural estate rests upon the basis of separate farm lots, careful consideration should be given to the question of sporting rights. The value of such rights may be materially affected if it is assumed that farms are in separate ownership.
9.4 Valuation approach where part of the estate is exempt or subject to reliefs
The first task is to consider how the estate should be lotted ignoring the exemptions or reliefs. If the whole of one or more of the resulting lots is exempt it is usually not necessary to value it. If the exempt portion comprises a part of one of the lots an apportionment between exempt and non exempt parts will be necessary. There is no statutory basis for this apportionment in the IHT Legislation and a just and reasonable method should be used. This will generally be a value based apportionment based upon the decision in the case of Salts v Battersby (see para 8.61 of the CGT & Other Taxes Manual).
9.5 General
The vacant possession value of agricultural land can be well in excess of its value subject to tenancy, particularly where the tenancy is protected under the Agricultural Holdings Act 1986 provisions, or let for a significant term. It is therefore important to establish the degree of security of tenure of any occupant.
A valuation for IHT may also be relevant as evidence for other taxation or for compensation purposes. It is, therefore, essential to maintain consistency of approach when determining whether vacant possession applies.
9.6 Vacant possession
Where no enforceable tenancy exists the property should be valued with vacant possession (subject to any adjustments necessary where an undivided share is transferred, see para 9.19 et seq below). Where the parties claim that an enforceable tenancy existed at the date of transfer although there is no written evidence, a strict interpretation of the evidence available should be adopted.
9.7 Subject to tenancy
In considering whether or not a tenancy exists, regard should be had to the matters covered in Practice Note 4.
9.8 Occupation by a company as agricultural tenant
A fact to bear in mind is that, in normal circumstances, if the tenant of an agricultural holding is a company, there is in all probability considerably less likelihood of the landlord eventually obtaining vacant possession than if the tenant is an individual, because a company does not die.
9.9 Occupation by partnership
In cases where the transferor is the owner or joint owner and a partnership is in occupation, HMRC should have indicated whether a tenancy exists. If this has not been done, the case papers should be returned to HMRC.
Doubt frequently exists where partnerships involve members of a family, but in considering such cases caseworkers should apply the normal criteria for the creation of a tenancy as discussed in Practice Note 4. It should be noted that under English Law (unlike Scottish Law) a partnership cannot of itself hold an interest in land, and the grant of any tenancy would have to be to one or more of the individual partners.
9.10 Failure to agree basis of occupation
Where, having regard to all the available evidence, the caseworker is unable to agree with the parties whether an occupation constitutes a tenancy he should - before an impasse is reached - refer the matter back to HMRC with a covering note setting out the points at issue and including any relevant documentation provided by the parties.
Where the caseworker considers that the basis of occupation suggested by HMRC is incorrect, e.g. in the light of additional information received, the caseworker should refer the matter back to HMRC with a covering note explaining the position.
9.11 Reserved
9.12 General
An agricultural tenant鈥檚 interest may be the subject of a transfer of value, either in life or on death, the occasions most frequently encountered being those involving Company and Partnership tenancies.
It is essential to obtain and consider all available information concerning the tenancy, in particular the agreement with any subsequent endorsements, prior to embarking on a valuation. Such documents will normally be provided by HMRC, but in their absence the caseworker should approach the parties direct.
Valuations of agricultural tenancies can give rise to complex arguments and in any cases of difficulty guidance should be sought from聽SVT聽Policy & Professional.
9.13 General
The principal behind package valuations is explained at para 7.35. For IHT purposes it is the whole estate that falls to be valued. The term 鈥減ackage valuation鈥� is something of a misnomer as individual units are not really being packaged together as the name implies. The estate is simply being divided into larger lots that contain more than one unit of property. The individual units in a lot can comprise either real or personal property or a mixture of the two.
9.14 Application
In an agricultural context this is most likely to apply where the deceases/transferor owned both an interest in a freehold property and a controlling shareholding in a company holding a tenancy of the same property. The hypothetical purchaser would have the opportunity to purchase both assets at the same time and would bid for them having regard to the possibility of merging the interests and obtaining vacant possession. It can also apply where the deceases/transferor owned the freehold and had control of a partnership which held a tenancy of the same property.
9.15 Authority
In Inland Revenue Commissioners v Gray (Executor of Lady Fox deceased) (Practice Note 1 Appendix F) the issue before the Court of Appeal was whether the deceased鈥檚 freehold interest should be valued together with her 92陆% share in a partnership which held the tenancy.
The Court of Appeal saw this as another example of prudent lotting and decided that whether one is taking apart or putting together the principle is the same. The vendor must be supposed to have taken the course that would get the largest price for the combined holding, subject to the caveat that it does not involve undue expenditure in time and effort.
For the taxpayer it was argued that neither the Lands Tribunal nor the Special Commissioners had jurisdiction to determine the value of an asset that was partly land and partly personal property. This was rejected because the Notice of Determination had been carefully worded by the Inland Revenue to avoid any suggestion that the Lands Tribunal was being asked to determine the value of personal property.
9.16 Procedure
HMRC will in the first instance invite the parties to agree the basis and caseworkers will usually only be requested to agree valuations when this has been possible. Occasionally caseworkers may first be asked to provide informal estimates without negotiation so that HMRC may consider the implications and effect on the estate as a whole before a formal reference is made.
The reference from HMRC should be clearly marked 鈥淧ackage Valuation鈥�. Caseworkers should clearly indicate in their report that a package valuation approach has been followed. Normal procedures and time limits will apply.
The caseworker may adopt a package approach without being specifically asked by HMRC to do so, but if the package includes an item that it is normally HMRC鈥檚 responsibility to value (such as shares in a company or an interest in a partnership) the caseworker must contact HMRC before doing so.
9.17 Valuation requirements
Generally, the approach will be to attach the marriage value to the freehold. The value of the freehold with marriage value will be obtained by deducting the value of the tenancy from the value of the freehold with VP. Thus, although the property is actually subject to tenancy, the value of the freehold as if with vacant possession is required.
A valuation of the tenancy will also be required and should be approached in the usual way. However, if it is an asset of the company considerations applicable in SAV cases may be relevant (see Section 16). It should be noted that it is often in the parties鈥� interest to maximise the value of the tenancy.
Where the deceased/transferor owned an undivided share in the freehold the value of the share will be requested. In relation to the tenancy however, the value of the entirety will often be required in order to facilitate a valuation of the shareholding or interest in the partnership.
In addition to the above the value of the freehold subject to the tenancy will often be requested by HMRC. This will be used to assess the amount of tax at stake in applying the package approach and may assist HMRC in their negotiations with the parties.
9.18 General
S.169(1) IHTA 1984 provides that in determining the value of any 鈥渁gricultural property鈥� (defined in s.115(2) IHTA 1984) 鈥渨hich includes cottages occupied by persons employed solely for agricultural purposes in connection with the property, no account shall be taken of any value attributable to the fact that the cottages are suitable for the residential purposes of persons not so employed.鈥� S. 169 may therefore restrict the market value of a farm collage, often to it鈥檚 agricultural value, but it applies only if it is both 鈥渁gricultural property鈥� and occupied as described. If a farm cottage is not so occupied, it should be valued to reflect any use to which it may legally be put.
9.19 General
Where agricultural property is jointly owned and/or occupied by two or more persons the interest of an individual transferor should be valued taking into account those factors which generally influence the valuation of undivided shares (see Section 18). If a husband and wife are joint owners or occupiers the related property valuation rules will most probably apply (see Section 15).
9.20 Joint owners contributing unequally in providing fixed equipment
Where HMRC are satisfied that joint owners have contributed unequally to the provision of fixed equipment they will make any adjustment necessary but may require the caseworker鈥檚 advice on the value of such equipment. This should be supplied in a separate memorandum to HMRC.
9.21 Valuation to reflect legal rights with regard to possession
Where land, which is jointly owned by two or more persons, is occupied under an agricultural tenancy within the Agricultural Holdings Act 1986, a valuation of an undivided share should take that tenancy into account. In other cases it should be assumed that vacant possession would be available to the joint owners.
9.22-25 Reserved
9.26 Possible 鈥渢ransfer of value鈥�
In certain circumstances the letting of agricultural property, whether on annual terms or for a fixed term, may constitute a chargeable 鈥渢ransfer of value鈥�. The reason is that the VP value of agricultural property can be greater than the value subject to the tenancy (particularly if the tenancy is protected under terms equivalent to the Agricultural Holdings Act 1986 or let for a significant term) and, even in cases where a full rent is payable, the value of the transferor鈥檚 estate will usually be diminished to a degree.
9.27 No gratuitous benefit
By virtue of s.10(1) IHTA 1984 however, a disposition is not a transfer of value for IHT purposes if it is shown that it was not intended, and was not made in a transaction intended, to confer any gratuitous benefit on any person and either:-
a. that it was made in a transaction at arm鈥檚 length between unconnected persons;
or
b. that it was such as might be expected to be made in a transaction at arm鈥檚 length
between unconnected persons.
Sub-section (1)(a) ensures exemption in respect of the straightforward grant of a tenancy on the open market. However in the case of a 鈥渇amily鈥� tenancy where the parties are connected (defined by s.270 IHTA 1984) HMRC will have to consider whether exemption applies having regard to s.10(1)(b) as well as to s.16 IHTA 1984 (see para 9.28 below) and caseworkers may be asked to provide informal advice as to whether the terms of the tenancy are such as might have been agreed at arm鈥檚 length. In any case where neither s.10(1) nor s.16 IHTA 1984 affords exemption further advice will be required by HMRC.
9.28 S.16 IHTA 1984
S.16 IHTA, (formerly s.97 FA 1981) supplements s.10(1) by stating that the grant of an agricultural tenancy shall not be a transfer of value provided that it is made for 鈥渇ull consideration in money or money鈥檚 worth鈥�. It is not a substitute for s.10(1) and in any particular case it is open to the parties to argue that there has been no transfer of value by reference to either of the two provisions or indeed both. It is for HMRC to decide whether or not they apply, but advice will be sought from the VOA.
It should be noted that although this provision was first introduced by s.97 FA 1981 it was expressly made retrospective in its operation and it applies to the grant of a tenancy before as well as after the passing of FA 1981.
9.29 Advice
Caseworkers receiving any requests from HMRC on any of the matters detailed in paras 9.26-9.28 above should contact聽SVT聽Policy & Professional for further guidance.
9.30-36 Reserved
9.37 Meaning of agricultural property
The VOA鈥檚 advice as to whether the subject property was 鈥榓gricultural property鈥� and used for agricultural purposes may also be sought by HMRC when referring their request for valuations. Guidance on the interpretation of agricultural property is to be found in Part 2 of this Section.
9.38-39 Reserved
9.40 Items to be excluded
Crops growing at the date of transfer on the land transferred are legally part of the land until severed. Nevertheless, the value to be reported should exclude the value of growing crops (i.e. produce which will normally be harvested, gathered or fed off) unless HMRC specifically request otherwise.
9.41 Items to be included
The value of permanent or temporary pasture and the value of any cultivations or unexhausted manures should be included, unless HMRC specifically request otherwise.
Where the parties have included growing crops with the value of the land HMRC will ask them to state their separate values. A note of the amount attributable will be made on the schedule before the case is referred to the VOA.
Where the caseworker is aware that the value returned by the parties includes the value of growing crops but no separate figure has been attributed, the case should be returned to HMRC so that the appropriate value may be entered on the schedule.
9.42 Query whether a sale price includes growing crops
Similarly where the caseworker is aware that the land has been sold and the sale price is relevant to the valuation then, unless the information is already available, the parties should be asked whether growing crops were included in the sale and, if so, for their estimate of their value at the date of sale.
9.43 Prior agreement
In prior agreement cases the parties should be asked to confirm that the value submitted excludes growing crops.
9.44-9.54 Reserved
9.55 General
In addition to valuation advice, HMRC may also request caseworkers for any available evidence to help in establishing if the requirements of s.117 IHTA, concerning occupation for the purposes of agriculture, were met by the deceased/transferor (see Part 2). Documents such as tenancy and grazing licence agreements, business accounts and descriptions of the deceased/transferor鈥檚 activity on the land are often available. Such documents are useful when advising on the requirements of s.117, and to assist with forming an opinion on the identification of agricultural property and its value.
Caseworkers should therefore request copies from HMRC where the documents are relevant to a particular case and have not already been provided with the original instructions.
9.56-59 Reserved