SolvedIHTM24034 | Agricultural property: Farm cottages
From HM Revenue & Customs · Inheritance Tax Manual
A farm cottage is eligible for relief if it satisfies two conditions
the occupier has the required status, and
It is your responsibility to decide whether the person occupying the property has the required status and to instruct the District Valuer accordingly.
The relief is primarily for cottages occupied by persons employed for agricultural purposes in connection with the agricultural property concerned. This is supported by the case of HMRC v Atkinson and another [2011] UKUT 506 (TCC). In this case the tribunal stated that 'The search is for some sort of connection between the residential use of the cottage and an agricultural purpose sufficient to make the use occupation for the purpose of agriculture'.
When occupied by an agricultural worker the tribunal stated 'the agricultural worker uses the cottage as a home because that is what he is and because he works on the farm. There is a sufficient connection between that use and the agricultural activities on the agricultural land for his occupation to be seen as being for the purposes of agriculture.
Considering whether the connection between the residential use of the cottage and the purposes of agriculture is "sufficient" is one of fact and degree. You should take into account
the nature of the work carried out by the worker
the time spent on the work by the worker, and
the regularity of the work done by the worker
for all activities, both agricultural and non-agricultural, carried out. Then, on balance, decide whether the cottage was occupied to enable the worker to carry out their agricultural activities.
Cottages occupied by retired farmworkers (who had worked on the agricultural property concerned), their widowed spouses or surviving civil partners (IHTM11032) are often also eligible for relief given by an ESC dated 13 February 1995 (ESC F16). The concession states that the occupation condition (IHTM24071) is regarded as satisfied by cottages occupied by retired farm workers or their surviving spouses or civil partners if either
the occupier is a statutorily protected tenant under the Rent (Agriculture) Act 1976 or Housing Act 1988 (or legislation which has similar effect in Scotland or Northern Ireland), or
the occupation is under a lease granted to a farm worker (for life and that of any surviving spouse or civil partner) as part of his contract of employment for agricultural purposes and which has a similar effect to that of a protected tenancy.
The term ’retired’ means someone who has ceased full-time work and is in receipt of a pension. It does not include a person who has simply left one job to work elsewhere. In cases where the occupier is still engaged in agricultural work the work does not necessarily have to be full-time. You will need to look at the circumstances in each case.
Relief at the higher rate (IHTM24140) is available for farm cottages where the agricultural worker occupied the cottage under an unprotected service tenancy, or assured shorthold tenancy, or the worker’s occupation arose under a tenancy which began on or after 1 September 1995.
It may be available when suitable alternative accommodation is available for the tenant, irrespective of whether the tenant was in default of the terms of their occupation. If the tenant was in default the position is straightforward, as vacant possession can be obtained. But if there is no such contravention, relief at the higher rate would be dependent upon satisfaction of one of the Cases for Possession in Schedule 3 of the Agricultural Holdings Act 1986, and there would be no actual right to vacant possession.
It is also available if the agricultural worker’s occupation of the cottage was protected and the benefit of the transitional provisions (IHTM24145) contained in IHTA84/S116 (2)(b) and (3) is available to the deceased or transferor. So the tenancy
began before 10 March 1981
the cottage was owned then
the tenancy has remained in force since then
the landowners had occupied the farm on which the cottage was located for 2 years before the grant of the tenancy
the landowner was, before the date of the tenancy, a full time working farmer within the rules set out in FA75/SCH8.
In all other instances the relief will be at the lower rate (IHTM24140). For deaths on or after 6 April 2026 relief at the higher rate will be limited to £2.5m, or up to £5m if unused 100% allowance can be transferred from a pre-deceased spouse or civil partner – see IHTM25500.
The guidance at IHTM24165 includes details of the special valuation rule that applies to agricultural cottages. Note that this rule applies primarily where the farm cottage is occupied solely for the purposes of agriculture. Where a farm worker carries on some level of non-agricultural activities, but there is sufficient connection (see above) that the cottage qualifies as a farm cottage, there may need to be some discounting of the open market value to arrive at the agricultural value. The DV will be able to advise here.