What happens where taxes overlap? And what is agricultural land?

You may be surprised that the same transaction can be treated differently for different taxes. For example, it sometimes happens that taxpayers, who haven’t taken professional advice, gift their main residence to the next generation but continue to live there rent free. The intention is normally to avoid inheritance tax or care home costs.

However, the transaction is effective for capital gains tax (CGT) but not for inheritance tax (IHT). As a result, the executors are generally unpleasantly surprised to find that not only is the house deemed to be owned by the deceased at the date of death (and thus subject to IHT) but also, when the house is sold, there will be a CGT liability on the increase in value since the date of the gift, so part of the value is taxed twice.

With this in mind, it’s worth considering a recent Stamp Duty Land Tax (SDLT) case. S and J Holding v HMRC [2024] UKFTT 337 (TC) came before the First Tier Tribunal in April 2024, when a taxpayer claimed the lower rate of SDLT on a property which included both “an impressive and beautifully presented five-bedroom Georgian country house,” a two-bedroomed cottage and staff flat, and some 40 acres of pasture which was largely used for equestrian purposes.

The taxpayer’s argument for a mixed (and lower) rate of SDLT was that more than half of the land should be considered agricultural, since it was used for the growing of forage; the size of the holding was such that it was not a normal domestic property. The tribunal considered various other factors, including the limited level of agricultural activity, the fact that the wholestating: was held on a single title at the Land Registry, and the marketing literature, (something which was also held to be relevant in the well-known IHT case of Arnander ) and decided in favour of HMRC, with the Chairman’s summing-up stating:

 “…the Fields are substantial, comprising some 24 acres. That is more than half the acreage of the Property. It is certainly a factor in favour of the appellants’ case. However, the Farmhouse is a substantial property. It is not unusual for a substantial country property to have grounds extending to many acres. Nor is it unusual that part of the grounds of a substantial property cannot be seen from the dwelling, which is the case with part of the Fields…. Taking all the evidence into account, on balance I have come to the conclusion that the Fields… did provide amenity and benefit to the Farmhouse and as such performed a function in relation to the Farmhouse as a dwelling. I am satisfied that the Fields formed part of the grounds of the Farmhouse at the time of the transaction.”

This case is purely concerned with SDLT but, of course, there have been many cases on similar valuation issues (admittedly more generally regarding farmhouses rather than land) for IHT purposes. The point about overlapping taxes mentioned above may mean that this case isn’t relevant for a different tax regime, but given that there’s an element of overlap here, and the valuation issues are common to both tax regimes, it’s worth bearing in mind when a small agricultural holding comes up for sale or passes under an inheritance.

As ever, and bearing in mind that where inheritance tax is concerned, the principal witness is usually deceased, maintaining evidence of previous agricultural use is always time well spent.

If you’re thinking of gifting land or property, we can help you with tax planning and succession planning. Please get in touch with our Farms & Rural Business team on 0330 024 0888 or email enquiry@larking-gowen.co.uk.

Laurie Hill