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HMRC internal manual

Inheritance Tax Manual

Character appropriate: Farmhouses

The factors that might be applied when determining whether a farmhouse is of a ‘character appropriate’ have been considered in a number of cases before the Special Commissioners, most recently in Antrobus [2002] STC (SCD) 468 and Arnander and others (executors of McKenna, deceased) v Revenue and Customs Commissioners and related appeal SpC 565 etc.

The main factors to be applied when determining whether a farmhouse is of a ’character appropriate’ are considered to be

  • Is the farmhouse appropriate by reference to its size, layout and content with the farm buildings and the particular area of farmland being farmed?
  • Is the farmhouse proportionate in size and nature to the requirements of the agricultural activities conducted on the agricultural land? You should bear in mind that different types of agricultural operation require different amounts of land. This is an aspect on which the VOA will be able to give advice.
  • Within the agricultural land does the land predominate so that the farmhouse is ancillary to the land?
  • Would a reasonable and informed person regard the property simply as a house with land or as a farmhouse?
  • Applying the “elephant test”, would you recognise this as a farmhouse if you saw it? Although this test involves some subjectivity it can be useful in ruling out extremes at either end of the scale.
  • How long has the farmhouse and agricultural property been associated and is there a history of agricultural production? The matter has to be decided on the facts that existed as at the date of death or transfer but evidence of the farmhouse having previously been occupied with a larger area of land may be relevant evidence.
  • Considering the relationship between the value of the house and the profitability of the land, would the house attract demand from a commercial farmer who has to earn a living from the land, or is its value significantly out of proportion to the profitability of the land? If business accounts have been supplied, copies should be forwarded to the VOA. Business accounts can give a useful indication of the extent of the agricultural activity being carried on, although a loss making enterprise is not on its own considered to be a determinative factor).
  • Considering all other relevant factors, including whether any land is let out and on what terms, is the scale of the agricultural operations in context?
  • There must be some connection or nexus between “such cottages, farm buildings and farmhouses, together with the land occupied with them” and the property to which they must be of a character appropriate. The argument that the nexus must be derived from common ownership rather than common occupation was accepted by the Special Commissioner in Rosser v Inland Revenue Commissioners [2003] STC (SCD) 311.

For the purposes of IHTA84/S115 (2) you should in particular note that property can include

  • the deceased’s/transferor’s interest in an agricultural tenancy or farm business tenancy, even though the tenancy may be treated as of negligible value as an asset in the deceased’s estate, and
  • agricultural land or pasture owned by a company controlled by the deceased/ transferor, or owned by a partnership of which the deceased/transferor was a partner.

You should be aware that for character appropriate (IHTM24050) purposes land leased by the deceased may increase the likelihood of any farmhouse being within IHTA48/S115 (2). But, it may work in the opposite direction regarding the occupation of the farmhouse for the purposes of agriculture (IHTM24060) if the farming operations and management were being conducted by others from elsewhere.