This has been an area of developing concern since HMRC denied business property relief (BPR) on the estate of Mrs McClean in 2005. Briefly the revenue contended (and the appeal court upheld the decision) that land let in conacre was an investment asset and not a business and therefore not entitled to BPR.
While this case has received much press coverage and professional consternation, its impact is largely limited to the situations where the land has a market value in excess of the agricultural value i.e. where the land has also development value.
The definition of conacre for tax purposes has developed over many years and involves a degree of land husbandry. To prove a valid conacre the farmer letting the land should retain responsibility for fertilizing, seeding, hedge cutting, drainage and other areas of land maintenance on the tenants behalf.
In the McClean case the conacre was agreed as a valid conacre arrangement and accordingly the land was entitled to and indeed was granted, agricultural property relief (APR) which exempted the agricultural value of the land set in conacre from inheritance tax. The conditions to qualify for APR require the farmer to actively farm the land for a period of 2 years, or for a period of 7 years to have the land occupied (by him or another) for the purpose of agriculture.
The Society of Trust & Estate Practitioners (STEP) sought guidance directly from HMRC in light of the McClean case. They received a reply on the 9th October 2009 stating "The recent decision made by the court of appeal has not reclassified conacre activities. The court of appeal however upheld the special commissioner’s decision that the deceased ran a business consisting wholly or mainly of holding investments, which IHT legislation excludes from BPR. The judgement turned very much on the specific facts of the case and it does not follow that all transfers of conacre land are excluded from BPR"
Fitzpatrick & Kearney Limited however would view the final part of HMRC’s statement with extreme care as the facts of the McClean case indicated a strong degree of land husbandry which proved the existence of a valid business. Where the case failed was that the business was deemed to be one consisting wholly or mainly of holding investments (land). Any attempt to prove a better conacre arrangement would still be at risk of failing the same business test!
Our understanding is that HMRC are now citing this case and refusing all claims for BPR on land let in conacre.
Is APR at risk under conacre arrangements?
One of the grounds for the appeal of the special commissioner’s findings was that the petitioners argued that the McClean decision if upheld, would mean that APR could be denied where land was occupied for the purposes of agriculture other than by the owner.
The crown stated in relation to this point that "this is not correct as in the McClean case APR was granted as the land had been let to graziers for the purposes of agriculture in each of the seven years prior to Mrs McClean’s death" and further in respect of an APR claim on property after two years they stated that "where APR is claimed on the basis that the property was occupied by the owner for the purposes of agriculture throughout the period of two years prior to the transfer, there would need to be some evidence of agricultural (as opposed to investment) activity by the owner to justify the relief."
The crown also acknowledges that in some cases APR may not be available for farmhouses where the sole or principal activity of the owner has been that of entering into seasonal grazing contracts with third parties for payment, but stated that entitlement will always be a question of degree and fact!!
This illustrates the continued belief that while BPR on land let as conacre is now at best at risk, all is not yet lost in respect of APR.
Farmers letting land in conacre should seek professional advice to ensure they do not jeopardise their entitlement to inheritance tax reliefs.
