Introduction

A recent decision by the Court of Appeal has raised concerns over the availability of inheritance tax (“IHT”) relief on agricultural land let under conacre.

Background

What is conacre?

The term “conacre” is unique to Northern Ireland. It refers to land let by a landowner to a third party for either the sowing and harvesting of crops or the grazing of livestock. Approximately one third of land in Northern Ireland is let under conacre.

IHT relief on conacre

Prior to the decision, land let under conacre in a deceased person’s estate would have been eligible for agricultural property relief (“APR”) on the agricultural value of the land and business property relief (“BPR”) on the development value of the land. In many cases, the combined effect of APR and BPR would result in no IHT being payable on the value of the land in the deceased’s estate. 

The McClean case involved Mrs McClean, a landowner who owned 33 acres of land let under conacre. Mrs McClean died in 1999. At the time of her death, the development value of the land was £5,800,000 but the agricultural value was only £165,000. Mrs McClean’s personal representatives claimed APR on the agricultural value and BPR on the development value of the land, thereby reducing the value of the land in Mrs McClean’s estate for IHT purposes to nil. HM Revenue and Customs challenged the claim for BPR on the development value on the basis that a farming business was not being carried on by Mrs McClean, rather the land was being let out (and the farming carried on by a third party) which was more akin to an investment activity. The case was heard by the Special Commissioners in 2008 and they found in favour of HM Revenue and Customs. Mrs McClean’s personal representatives appealed to the Court of Appeal but the appeal was dismissed. Mrs McClean’s personal representatives can apply to have the case heard before the House of Lords, but doing so would incur significant legal costs with no guarantee that the ruling would be favourable. 

The implications of the dismissal of the appeal are that BPR on the development value of land let under conacre is no longer available. This could result in significant IHT liabilities where the development value of the land is much higher than the agricultural value. This will affect a large number of families who won such land. In the McClean case, the additional IHT liability is £2.4 million. It does not affect land which is actively farmed. We understand that HM Revenue and Customs have kept open enquiries into similar IHT cases in anticipation that the Special Commissioners’ decision would be in their favour. These cases will be reviewed by HM Revenue and Customs in light of the McClean case. Difficulties could arise where an individual owning land let under conacre died at a time when development values were at their peak, as the IHT liability on the estate will be calculated by reference to these values.

It is possible to reduce the IHT liability if the land is sold at a loss within three years after death. There is no provision to reduce the IHT liability if the land has been sold outside the three year period after death or has not been sold at all. Land may have to be sold to pay the IHT liabilities. Families who want to pass land down within the family will not want to do this. Land let under conacre may also benefit from attractive capital gains tax reliefs (“CGT”) whereby a capital gain on the sale of the land, which would otherwise be taxed at 18%, is taxed at 10% because conacre letting is considered to be a business activity rather than an investment activity.

Whilst the Court of Appeal’s decision does not relate to CGT, there is a risk that HM Revenue and Customs may use the decision to argue that land let under conacre is an investment asset and therefore deny the 10% tax rate. This may not just have an impact on the 2008/09 tax year and future years as HM Revenue and Customs can enquire into individuals’ self assessment returns already submitted if they consider that the return did not disclose adequate information to enable the to identify a disposal of land let under conacre.

It is important that individuals who currently own land let under conacre, or who have sold land let under conacre for development purposes in recent years, consider the potential impact this ruling could have on their tax position.

Possible solutions to mitigating a future IHT liability include:

Ø             Gift land to beneficiaries (e.g. children) whilst it is still actively farmed by the landowner;

Ø             Consider taking out life assurance for any IHT exposure on land let under conacre which has bee gifted away in the past seven years or which will be retained post death;

Ø             Cease letting under conacre and revert back to active faring (using a subcontractor or otherwise); or

Ø             Enter into a “joint venture” arrangement in respect of land currently let under conacre whereby the land is actively farmed by the other party, but both parties are partners in a farming business. This could be structured through a partnership, limited company, or limited liability partnership.

The above solutions are general suggestions only and may not be appropriate in every case.

Three bills were passed on 2 July 08 and deal with child maintenance legislation, the second Budget bill and asbestos inhalation laws, while the new libraries order achieved Royal assent on June 17 and the final flurry of NI business began on Friday, May 23, with the fast-tracked Commission for Victims and Survivors and Local Government boundaries bills. It was on 17 October 2007when the First Minister and Deputy FM outlined a total of 15 bills to be brought before the Assembly, with another three added in February 08. The 18 included Education Reform, Budget Bill, the Children (Emergency Protection Orders), Child maintenance, the licensing of goods vehicles, asbestos inhalation (mesothelioma), building regulations, charities, pensions and diseases of animals. And apart from Council boundaries and the victims commissioners, the final seven which have received Royal Assent include the Emergency Protection orders and the budget, as well as a pensions bill and the public health amendment bill, which extended Department of Health powers to make regulations over the spread of infection or contamination.  

Some of the legislation, however, did not originate in the province, including the Welfare Reform Act, which is part of a UK-wide attempt to update the benefits system, the Pensions reform, also of nationwide import, and both the Child Maintenance Act and the Mesothelioma Act, covering financial compensation for asbestos inhalation sufferers. The Taxis Bill, involving a new regulatory regime for services, and the Libraries Bill, setting up a new Library Authority, as well as the Local Government (Boundaries) Bill, originate from measures put in place by the Review of Public Administration. Two of the laws - Building Regulations and the Goods Vehicle (Licensing of Operators) Bill - are still going through the committee process, while three others - the Public Authorities (Reform) Bill, Civil Registration Bill and Health and Social Care Bill have reached their second stage. The Education Reform Bill has yet to be brought before the Assembly.

As part of the Northern Ireland Executive's Review of the domestic rating system, it was agreed that the rating of empty homes should be introduced as soon as possible, with the preferred level of liability 100%. This was subject to further consultation and the necessary impact assessments being undertaken.

The Minister for Finance and Personnel has published a consultation paper seeking views on the detailed proposals. Consultation closes on 15 August 2008. A copy of the Consultation Paper, along with the initial Integrated Impact assessment is available from www.ratingreviewni.gov.uk

Since the Assembly’s latest resurrection and reincarnation in May 07, the Assembly members (MLAs) have been exercising their new-found law-making powers to pass primary legislation under the Northern Ireland Act 1998 (NIA 1998). Areas that the Assembly has no jurisdiction to legislate on –excepted matters- are defined fully in NIA 1998, Sch. 2 and include: the Crown; the UK Parliament; Parliamentary elections; the franchise; international relations; defence; nuclear weapons; nationality; immigration; asylum; UK tax law; national insurance contributions; the appointment and removal of judges of the Supreme Court of Judicature of Northern Ireland and other judges; elections; and national security.

Sch. 3 outlines areas that have been reserved by Westminster, but which may be ultimately devolved to the Assembly. These areas include: navigation; civil aviation; domicile; the Post Office; and crucially, the criminal law; prosecutions; the treatment of offenders; the maintenance of pubic order; giving powers to the police; the Northern Ireland Parades Commission; the establishment, organisation and control of the police force; and firearms/explosives. Finally, NIA 1998 referred to “transferred matters” – essentially all other areas not covered in the definitions of excepted matters in Sch. 2, and reserved matters outlined in Sch. 3.

Mirroring the constitutional practices of Parliament (Westminster), the Northern Ireland Executive  (effectively the government), which is comprised of the first minister, deputy first minister, 10 ministers and currently two junior ministers, is accountable to the Assembly for its actions. Thus ministers give statements to the Assembly, are given oral and written questions from MLAs and appear before departmental Assembly committees where the ministers are questioned/probed/scrutinised on policies etc. In addition MLAs can scrutinise the work of each department further by questioning civil servants from those departments and indeed any individual who can provide pertinent evidence/information. The departmental Assembly committees are given a very broad scrutinising brief and remit under NIA 1998, s.44 to call to book the Executive/machinery of government in Northern Ireland. Currently there are 11 Departmental Committees shadowing the 10 Executive Ministers and the 1st Minister/Deputy 1st Minister.

In addition, there are six standing committees of the Assembly:

• the Assembly and Executive Review Committee,  which considers matters relating to the functioning of the Assembly or the Executive Committee as may be referred to it by the Assembly;
• the Committee on Procedure, which considers and reviews the Standing Orders and procedures of the Assembly;
• the Business Committee, which makes arrangements for the business of the Assembly;
• the Public Accounts Committee, which considers accounts, and reports on accounts laid before the Assembly, and as with all the committees, has power to send for persons, papers and records and to report to the Assembly;
• the Committee on Standards and Privileges, which considers specific matters relating to privilege referred to it by the Assembly, oversees the work of the Assembly Clerk of Standards and examines the arrangements for the compilation, maintenance and accessibility of the Register of Member’s Interests, reviews the form and content of the registers, considers any specific complaints made re registering/declaring of interests referred to it, and generally considering any matter relating to the conduct of members, including specific complaints regarding alleged breaches of any codes of conduct and
• the Audit Committee.

The membership and allocation of chairs/ deputy chairs to these standing committees reflects the numerical strength of the various parties in the Assembly chamber.