BPR and contract farming

A client died with 30 acres farmed under a contract farming agreement to his son. Minutes of meetings/accounts etc showed the agreement was put into practice. The land had substantial development value.

HMRC are challenging the contract farming agreement on the same basis as McCall v hmrc 2009, that it is an investment business not a farming business. They say they are challenging a number of other similar arrangements at the moment. Are other members aware of this, and have they successfully argued against hmrc?

Simon Northcott

HMRC seem to have fastened on the idea that this is the best way to limit IHT BPR without any change in the legislation. I know of a case on BPR for a livery business which is on its way to the Tribunal, where the argument for HMRC is that it was an investment business due to the arrangements with owners of horses.

There is a variety of pitfalls with contract farming agreements, eg avoid creating a partnership, an employment scenario, a tenancy, but there are standard forms of agreement which deal with these issues and they ensure that overall responsibility for the trade remains with the farm owner who has to be consulted by the contractor. So long as those terms are actually carried out, there should not be the creation of an investment business for the owner.

Much will depend on the precise agreement entered into. Perhaps if, at the other end of the spectrum, the terms are for the land to be farmed by a third party for a fixed payment per annum without involvement of the landowner it will be an investment business, but that would not usually be how contract farming is carried out.

A point not always appreciated by HMRC is that no owner of a trading business has to do all the work in person. He or she can instruct others to run the trade under supervision of the owner, or of a manager, and that does not mean that it ceases to be a trade carried on by the owner.

Malcolm Gunn

M B Gunn & Co Ltd