There has been another significant Inheritance Tax case, which may affect farmers.  This case involved a farmhouse in Cornwall, where the Executors of the estate of Mr David McKenna deceased were arguing that the house was a farmhouse, but failed in their argument at the Commissioners. 

The result is that Inheritance Tax was payable on the house and several of the outbuildings.  More significantly the Special Commissioner, who decided the case, has made several points that farmers should note.

David McKenna and his wife owned The Rosteague Estate on the Roseland Peninsula.  This consisted of 188 acres of land, including 52 acres of foreshore.  There are 10 acres of woodland and around 110 acres of farmland.

Rosteague House is extremely old and was described in the sale particulars as being an historic and substantial manor house, Listed Grade II*.  It has seven bedrooms, many public rooms and a staff flat.

Mr McKenna purchased the estate in 1945, and from 1972 to 1984 it was let out on a tenancy.  From 1984, when Mr McKenna was 73 years old, until he died, the land was farmed under various contract-farming agreements. 

Under this type of agreement the landowner typically provides the land and buildings.  The contractor provides the machinery, labour and undertakes the physical work on the land.  The landowner is farming for Income Tax purposes, and the contractor pays tax on his income as a contractor.

In practice the last contract farming operation was managed by the land agent, and on a quarterly basis there was an exchange of invoices.  Typically the contractor would invoice Mr McKenna for, say, ploughing and planting crops.  Mr McKenna would send an invoice to the contractor for the sale of crops.

The invoice from Mr McKenna to the contractor was always greater than the invoice going the other way by exactly the amount of the agreed quarterly payment by the contractor to the landowner.  In practice the contractor undertook most of the farming operations.

So back to the Special Commissioners decision.  For Inheritance Tax purposes it had to be decided whether Rosteague House was a farmhouse.

The principals that were used included whether the house was the dwelling from which the farm was managed.  Also the dwelling had to be the farmers house, and the farmer was the person who farms the land on a day to day basis.  In addition, the house may be this, but have been made much too grand, and therefore not be classed as a farmhouse any more.

It was concluded that the house was not used as the main dwelling from which the farming operations were conducted and managed.  Also it was the Land Commision’s view that the house was grander, more elaborate and more expensive than was required for the size of farming operations.  It was a rich man’s residence not a farmhouse.

It was also the Commission’s view that even if it was a farmhouse, then it was not of a character appropriate to the property, and would not receive Inheritance Tax relief.

The Inheritance Tax at stake is 40% of the value of the farmhouse and so can be enormous.  So who needs to worry?

Typically, commercial farmers, who have an interest in land and occupy  the farmhouse as the centre of the farming operations, and the farmhouse is appropriate in size in comparison to the business, have no need to be concerned.

Unfortunately, some commercial farmers could fall foul of this.  Where the farming operation has been handed to children, and the management has moved from the main farmhouse to another property there could be an issue.

Also, there could be a problem where farming has been delegated to another party, for example certain contract farming arrangements.  But, it should be remembered that Mr McKenna took little responsibility for the farming or risk.  It appears that it was farming in name, but not in practice. 

If you have a contract farming operation, and believe that you may get Inheritance Tax Relief on your farmhouse then review the farming agreement, on paper and in practice. 

Are you taking part in the management?  Are you taking risk?  Are you asking the contractor to undertake operations that are your responsibility?  Contract farming, is farming, but does require a certain input from the farmer.  Be sure that you play your part, and don’t delegate this to others.

If you think that you have a problem with Inheritance Tax on your farmhouse, then you may be right.  Assessing the position may result in alternative strategies for avoiding Inheritance Tax, so all is not lost.

Finally, most commercial farmers should not be too concerned, and Inheritance Tax relief can still be claimed in most cases.

First published in The Western Morning News

Posted on 03 Feb 2007