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HMRC internal manual

Inheritance Tax Manual

Occupation: Definition of a lease as opposed to a licence

It is important to have an understanding of the difference between a lease (that is a tenancy) and a licence under general law so that you know what you are dealing with in any particular case.

The requirements for a lease are

  • exclusive possession of a defined area of land,
  • for a fixed period (or series of periods) of time,
  • with the intention to create an estate in land - that is an interest in the land itself which can be assigned or sold.

Rent will usually be paid but it is not an essential requirement. Exclusive possession for a term under an enforceable agreement (for example by deed) will be sufficient.

However, it is unlikely in practice that a periodic tenancy would be granted without provision for payment of rent and the absence of such provision may well suggest a licence rather than a tenancy.

A licence is simply a permission to use land. It allows someone access to the land of another for an agreed purpose. It is an authority that justifies what would otherwise be a trespass. It does not confer any interest in land.

If there is no exclusive possession then the arrangement cannot be a lease and must be a licence.

The general rule is that the Court will look at the substance of the agreement rather than the form in which it is expressed. Street v Mountford [1985] AC 809 gives a good exposition of the law in this area.

Other arrangements that may be encountered which are not grazing licences include Profits a prendre. This is an entirely different legal mechanism being an incorporeal heriditament, a right to take something that is part of the land and capable of being sold from another person’s land - in this case a Right of Herbage whether for a fixed or periodic term. Other arrangements are taking in livestock under arrangements known as tack or agistment. These comprise the taking in of livestock at a rate of so much money per head.

Grazing licences can be both verbal and written agreements. The rights and responsibilities under a grazing licence agreement vary from where the grazier takes responsibility for all the farming operations, to arrangements whereby the landowner carries out husbandry operations to grow the grass crop and the grazier brings on his livestock to the land to eat the grass crop off. It is important to identify where these responsibilities lie in the grazing licence agreement and also to identify whether or not the responsibilities in the agreement have actually been carried out in accordance with that agreement on the ground.

However how a grazing licence agreement has been worded and operated in practice is important when considering Agricultural Property Relief. This is because it is relevant to the IHT treatment of the land itself, but also the consequences of the wording or operation of the agreement upon the application of relief to buildings, particularly the farmhouse as well as other cottages and farm buildings.

The terms and practical operation of a grazing licence agreement will determine the fundamental question as to who is the actual occupier of the land for the purposes of assessing compliance with Section 117 of IHTA 84.

It is therefore important to obtain as much information as possible about the terms and operation of the licence in order to correctly assess these provisions.

The availability of Agricultural Relief is a question of fact and degree to be decided upon the particular facts of each case. Recent litigation in relation to claims for Business Property Relief as regards the occupation of land on grazing agreements in Northern Ireland, has provided further guidance about interpreting such situations. Any case where this is an issue should be referred to Technical.

It is unlikely that a landowner who has allowed most or all of the agricultural land to be occupied on a grazing licence agreement where he or she does nothing but collect the rent and maintain boundaries, will be considered to be in agricultural occupation of that land. Consequently, as there is no farming activity actually being carried out, any associated house cannot be considered to be a farmhouse, so it would not be eligible for agricultural relief.