Farmers may be forced to pay thousands of pounds in inheritance tax after a landmark ruling that a farmhouse is no longer exempt from tax laws.
Benefactors for a Tudor farmhouse on a 126-acre Warwickshire farm were told they had to pay thousands of pounds in inheritance tax because the property did not qualify for agricultural relief.
The legal wrangle over inheritance tax at Cookhill Priory had been rumbling since the death of former owner Rosemary Antrobus in 2001.
Taxation experts are now warning the case has set a precedent, with many farmers unlikely to claim agricultural relief on their farmhouses.
Shona Cutler, personal taxation partner at Birmingham chartered accountants Clement Keys, said she was concerned the decision on Cookhill Priory would have farreaching consequences for farmhouse owners throughout the UK.
She said: "Inheritance tax is a tax that has got real teeth to it. Now, with the increase in property values and also this Antrobus case, the expected revenue the Government is going to collect is much higher than ever before.
"It is a hidden tax, charging people who may not be aware of this change until the death of a relative. They may have to sell land to fund these tax bills."
Ms Cutler said those who inherit a traditional farmhouse and land may have to pay out the difference between the property's value as a building classed for agricultural occupancy and what it would fetch on the open market. For those who have diversified, the agricultural relief may be lost altogether.
In the case of Cookhill Priory, HM Revenue and Customs accepted the land and farm buildings were entitled to agricultural property relief but claimed the farmhouse was not. After a court case it was agreed the farmhouse qualified for relief but the value of the farmhouse was in excess of its agricultural value and inheritance tax was therefore payable on the difference.
In arriving at its decision, the Lands Tribunal established that market value is the price the property could be expected to fetch if sold on the open market - and is the figure to be used for inheritance tax purposes - while the agricultural value is that which applies to properties subject to a perpetual covenant prohibiting them from being used as anything other than agricultural property.
"This is effectively an Agricultural Occupancy Condition which is a planning constraint designed to limit the occupation of new farmhouses to families whose income is generated wholly or mainly working in agriculture. This legislation has been transferred across to the inheritance tax rules," said Ms Cutler.
"The Lands Tribunal ruled that the agricultural value of Cookhill Priory was 70 per cent of the farmhouse's market value so 30 per cent of its value was therefore subject to inheritance tax at 40 per cent."
With farmers diversifying in order to maintain a decent standard of living, the picture is even more gloomy, according to Ms Cutler.
"Things like farmers diversifying run the risk of losing agricultural property relief completely. There are major issues about at what point the farm qualifies."