Inheritance Tax Manual

Practice note 10: part 2 - assessment of agricultural value

The Valuation Office Agency's (VOA) technical manual relating to Inheritance Tax.

1. Statutory definition of “agricultural value” - Section 115(3)

S115(3) defines agricultural value as follows:-

“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 were subject to a perpetual covenant prohibiting its use otherwise than as agricultural property.”

2. Exclusion of value arising from any non-agricultural purposes

The “agricultural value of any agricultural property” will exclude any value attributable to the use of the land for purposes other than agriculture. This would exclude any additional value arising from the use of the land as a deer forest, for games, building, mining, quarrying (except in connection with the agricultural use of lands used therewith), working brickearth, or for any other non-agricultural use (eg. the letting of the land for periodic race meetings or siting of caravans).

The test in each case should be:-

“Would the use of the land for some purposes for which it has additional value be a breach of a covenant not to use the land except as an agricultural property?”

3. Exclusion of certain amenity value

The agricultural value of agricultural property would exclude any amenity value the property gives to other land. For example, the statutory assumption of perpetual restriction to agricultural use would make it unnecessary for any adjoining owner to bid more than the agricultural value to ensure retention of the amenity that preservation of agricultural use provides.

4. Exclusion of non-agricultural residential value

Some prospective purchasers of a farm may be interested in it mainly because of the attractiveness of the farmhouse as a residence or for some other reason not directly connected with agriculture. In such circumstances, they may be prepared to pay a price above the level which would be achieved if the property were subject to the perpetual covenant of s115(3). This higher price may be obtained even if the successful purchaser intends subsequently to farm the land. Location is an important factor in valuation. It is usually houses situated within easy travelling distance of conurbations where the market value is most likely to exceed the agricultural value.

Some analogy may be drawn with an agricultural planning tie. Such a tie, however, may be less restrictive as occasionally it can be lifted whereas s115(3) assumes a perpetual restriction. The caseworker must follow the market and be wary of “rule of thumb” discounts. Whilst it is arguable that the existence of any restriction on use would tend to reduce the value, the caseworker should seek only to distinguish between the agricultural value and the open market value as defined in s160 when there is evidence to support a difference or a clear prospect of some non agricultural use.

5. Cottages - section 169(1)

S169(1) provides in relation to the value of “agricultural property” that:-

“In determining the value of agricultural property which 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.”

S169(1) restricts the definition of open market value as defined in s160. It does not apply to agricultural value as defined by s115(3). Consequently, the caseworker must determine the open market value as restricted by s169(1) and the agricultural value of farm cottages that are so occupied and qualify as “agricultural property”.

By an Extra-Statutory Concession dated 13 February 1995 cottages occupied by retired farm employees or their surviving spouses may be deemed to satisfy, inter alia, s169(1) on certain conditions specified in the ESC. However, if there are cottages to which one or more of the three circumstances set out in Part 1, para 5, Limb (3)(a)(ii) above apply, in seeking advice from the CEO Technical Centre, the caseworker’s submission should incorporate an informal opinion of the open market value, ignoring the restrictive effect of s169(1), and the agricultural value of the relevant cottages.

6. Sporting rights

Where land, which is “agricultural property” within s115(2), is partly devoted to sporting purposes, the agricultural value of that land will include the value of the sporting rights over it which are consistent with normal agricultural use. This is so, whether such rights are included in the occupation of the land, are reserved by the owner or, are the subject of a separate letting.

The shooting of ground game would not constitute a breach of the assumed covenant under s115(3) prohibiting the use of the property otherwise than as “agricultural property”. The shooting of winged game would probably not constitute a breach of such a covenant. The shooting of animals and birds that consume or damage crops or prey on livestock would also not breach the covenant.

However, where sporting rights over and above normal agricultural use exist, they are to be valued separately to open market value in accordance with s160.

Any case of dispute where the value attributable to sporting rights is considerable should be referred to the CEO Technical Centre for advice.

7. Fishing rights

Under no circumstances can any value arising out of the exercise of fishing rights be included in the agricultural value. Fishing rights are valued separately to open market value under s160.

8. Interaction of agricultural relief with business relief

It is not uncommon for the open market value to exceed the agricultural value of at least certain parts of an estate. For example, hope value may exist arising out of the prospect development of some of the land or the change of use or conversion of a farm building. Provided those parts of the estate with hope value were used in the business of the transferor/deceased then Business Relief may be available on the difference between the open market value and the agricultural value. It is as well to be aware that in such cases Business Relief, if granted, will usually be at the same rate as Agricultural Relief, though not always. Business Relief, however, is not normally available on dwellings, though it may be on parts of a farmhouse exclusively used for the purpose of any business. Generally, if the open market value of a farmhouse exceeds its agricultural value, which may often be the case, then Business Relief is unlikely to be available on the difference between the two bases of value.

The interaction of these two reliefs can be complicated. Therefore, for further guidance, see Chapter 1B, 9.69.