Estate planning update

Agricultural property relief

Agricultural property relief (APR) and its application to a Buckinghamshire farmhouse was the subject of a successful appeal of a revenue determination to the First-tier Tribunal (FTT) by the taxpayer in Hanson v HMRC [2012] UKFTT 95 (TC).

The case involved the question of whether, in order to qualify for APR, a farmhouse and the land to which it is of a 'character appropriate' must be in the same ownership and the same occupation, or need only be in the same occupation.

Mr Joseph Charles Hanson, who died in December 2002, was the life tenant of a qualifying interest in possession trust. The trust held a property which both parties agreed was a farmhouse for the purposes of APR and which had an open market value of £450,000 at the date of death.

Mr Hanson's son had occupied the farmhouse since 1978 and he farmed 215 acres of surrounding land, some of which he owned and some he part-owned. The remainder was owned by others. There was 128 acres in common occupation with the farmhouse, but the only land in common occupation and common ownership with the farmhouse was the 25 acres part-owned by Mr Hanson and farmed by his son.

After Mr Hanson's death, HMRC denied his executors' claim to APR on the value of his interest in the farmhouse. Mr Hanson's son appealed HMRC's notice of determination in his capacity as sole trustee of the trust, which would have been liable to pay the inheritance tax on the value of the farmhouse if APR did not apply.

It was conceded by HMRC before the hearing that if the 128 acres in common occupation with the farmhouse was the relevant land for the character appropriate test, then the farmhouse would qualify for APR under section 115(2) IHTA 1984. On the other hand, it was conceded by Mr Hanson's son that, if common occupation and common ownership was the relevant character appropriate test then the 25 acres in both common occupation and common ownership was insufficient for the farmhouse to pass. Therefore the case concerned a fairly narrow point, namely the interpretation of the character appropriate test in section 115(2) IHTA 1984.

Section 115(2) defines agricultural property as agricultural land or pasture, woodland occupied with but ancillary to agricultural land or pasture, or any building used in connection with the intensive rearing of livestock or fish if the building is occupied with but ancillary to agricultural land or pasture. The definition also includes 'such cottages, farm buildings and farmhouses, together with the land occupied with them, as are of a character appropriate to the property'.

The question of whether a farmhouse is of a character appropriate to the property (the so-called character appropriate test) was previously considered in the reported cases of Starke v IRC [1995] STC 689 and Rosser v IRC [2003] STC (SCD) 311.

In Starke, the Court of Appeal identified common ownership and common occupation as potential connecting factors between the farmhouse and the property taken into account, but there was no decision as to whether either or both factors were necessary.

In Rosser, the special commissioner found that common ownership was required, but did not comment on the need for common occupation. According to HMRC's existing guidance, and as put forward on behalf of HMRC in Hanson, the current view of HMRC is that there must be common ownership and common occupation of the farmhouse and the land.

However, in deciding in favour of Mr Hanson's son, the FTT found that when determining whether a farmhouse qualifies for APR the farmhouse and the land to which it is of a character appropriate must be in the same occupation, but need not be in the same ownership. On the basis that the farmhouse was in the same occupation as 128 acres of agricultural land, the character appropriate test was satisfied. Therefore Mr Hanson's interest in the farmhouse qualified for APR on his death.

The FTT applied a literal construction of the wording in section 115(2) and held that occupation, rather than ownership, was the connecting factor between a farmhouse and the property to which it was of a character appropriate.

The FTT decision is significant for farming families and partnerships where the ownership of a farmhouse is separate from the ownership of the farmed land. It does not just apply to farmhouses, but also to other agricultural property such as cottages and farm buildings as set out in section 115. It is easy to imagine a situation arising where an older farmer moves out of the main farmhouse to make room for the next generation and gives away land farmed from the farmhouse, while retaining ownership of the farmhouse.

HMRC emphasised to the FTT that the interpretation of section 115(2) IHTA 1984 is an important point. It is anticipated by many practitioners that HMRC will appeal. However, while the FTT decision goes against HMRC's existing guidance, neither Starke nor Rosser are authority for the view that both common occupation and common ownership are required to satisfy the character appropriate test. The appeal decision, if indeed an appeal is lodged, will be of interest to many farmers and private client practitioners alike.

Costs risks

In the last estate planning update (156/3, 24 January 2012) I discussed the case of Wharton v Bancroft and others [2011] EWHC 3250 (Ch). Following the ruling that the deceased Mr Wharton's deathbed will was valid despite the circumstances of its preparation, the costs judgment has now been published ([2012] EWHC 91 (Ch)).

In awarding costs on the indemnity basis against the deceased's three adult daughters, Norris J stated that their case as to want of knowledge and approval was 'legally and factually weak to such a degree' that the case lies 'outside the norm'. Also said to be outside the norm was the way in which the daughters' case was conducted, with excessive enquiry into irrelevances which served to increase Mrs Wharton's legal fees (which she was funding herself) with the perceived purpose of persuading her to settle the claim at an early stage. In fact Mrs Wharton did make a part 36 offer but this was rejected by the daughters.

Despite the daughters' own costs having been the subject of a conditional fee agreement, they are still liable to pay legal costs in excess of £500,000 '“ those of Mrs Wharton and the executors. In times where it is increasingly likely for a will covering a £4m estate to be contested, this case is a reminder of the costs risk involved in commencing contentious probate proceedings as well as the pitfalls of rejecting a part 36 offer.

Reduced IHT rate

The recent Budget contained several key announcements of interest to private client lawyers, their clients and the public in general. From a wills and probate aspect, it is helpful to have confirmation that the draft legislation published in December dealing with the reduction of the inheritance tax rate from 40 per cent to 36 per cent for individuals who leave at least ten per cent of their net estate to charity will indeed be introduced in the Finance Bill 2012, with only minor changes. The reduced rate will apply in relation to deaths on or after 6 April 2012.

The Society of Trust and Estate Practioners (STEP) has published a draft model clause for wills to be used for testators wishing to take advantage of the new legislation. Given the fairly complicated wording of the draft legislation itself, it is helpful for practitioners to have such a clear model clause to work from and it is hoped that it will encourage the widespread use of the new reduced rate.

The mathematically minded among you will have calculated that where a testator was planning to leave at least four per cent of his net estate to charity in any case, there will be no loss suffered by his residuary or non-exempt beneficiaries if he increases the charitable legacy to ten per cent of his net estate such that the reduced rate applies. Even though the non-exempt beneficiaries would only receive 90 per cent of the net estate rather than 96 per cent, the reduced rate of tax means that the amount passing to the non-exempt beneficiaries (net of IHT) would be unchanged. Indeed it is possible for all the beneficiaries (exempt and non-exempt) to receive more by a testator increasing the charitable legacy from five per cent to ten per cent of the net estate.

The loss is suffered by HMRC in the form of lower IHT liability for the estate.

Policy changes at the probate registries

In the last few months, there have been some changes at the probate registries. It has been noted that the Principal Registry in London no longer accepts probate applications from solicitors. While it is understood that the majority of solicitors' applications are submitted to one of the district registries as a matter of preference, the change of policy took some practitioners by surprise as it appears that there was no formal announcement. There also seems to have been a further change of policy at some district registries whereby caveats are, apparently, being routinely entered without a check first being made as to whether a grant has been issued already. The concern with such a practice is that the successful entry of a caveat could lead the solicitor concerned to believe that no grant has yet been issued. This could impact on the nature and timing of communications with third parties in contentious probate situations.

Practitioners might consider entering a standing search at the same time as the application for a caveat (if time is of the essence) as this should determine immediately whether a grant has already been issued.