APR on farm cottages owned by trust sub fund in Relevant Property Regime but land owned by TSI sub fund

A life interest trust was created in 1968. Over the years various sub-funds have been created. One of the sub-funds is in the Relevant Property regime. Another is a Transitional Serial Interest so is not subject to the Relevant Property regime.

There is a Ten Year Anniversary arising on the Relevant Property sub-fund in March next year. The RP sub-fund owns cottages some of which are occupied by agricultural workers. The RP sub-fund owns no agricultural land. The TSI sub-fund of the same trust (but not in the same IHT regime) owns the agricultural land.

The land and cottages are let to a farming company that uses the land (and 3 of the cottages) for agricultural purposes (subject to a lease created in 1968). The property has been owned by the trust since 1968.

My question is:

Can the RP sub-fund make a valid claim for APR on the cottages occupied by agricultural workers when the agricultural land (which is usually the first hurdle for claiming APR) is owned by a different sub-fund which is not itself in the Relevant Property regime?

I know for CGT purposes that a trust is treated as one whole body with sub-funds ignored (unless specifically elected to be treated separately). So can the trust consider all property owned (and so ignore the sub-funds demarcation) for IHT purposes or must I only consider the property which is held in the RP sub-fund in isolation? Does the fact that the RP fund owns no agricultural land mean that the cottages fail the second condition of being “of a character appropriate to the agricultural land”?

Sharon Woolner
Wright Vigar

The three cottages are eligible for agricultural relief under IHTA 1984 s 117(b) because they have been owned for 7 years and occupied by another (the company) for the purposes of agriculture for those 7 years. The cottages are valued at agricultural value only (IHTA 1984 s 169). Any occupied by retired workers can also qualify.

The worry is what the rate of relief will be. The conditions for 100% relief are in IHTA 1984 s 116(2) and it would seem that the company has an AHA tenancy so that the rate of relief is 50%. It seems likely that this same rate will also apply to the land in the life interest fund on the death of the life tenant.

Th trustees should consider replacing the existing tenancy with a Farm business tenancy so as to give an immediate increase in the rate of relief to 100%. This can have both CGT and SDLT consequences. In general terms the CGT issue can usually be dealt with but the SDLT may not be avoidable as far as I am aware.

Malcolm Gunn

M B Gunn & Co Ltd