IHTM24152 | Value and Valuation: Treatment of mortgages and debts

The general rule for the deduction of mortgages and other debts is that

• debts charged on any property should be deducted primarily against the value of the property on which they are charged, and

• debts not charged on any property should be deducted primarily against personal property not qualifying for agricultural relief.

Accordingly, to calculate the value for relief it is normally sufficient for you to

• deduct debts charged on the agricultural property from the value of the property and then

• calculate the relief by reference to the net value.

Exceptionally you may have to deduct other liabilities from the value of the agricultural property if

• the personal estate is not sufficient to meet the liabilities not charged on any property, or

• debts charged on non-agricultural property exceed the value of the property on which they are charged.

You should apportion any liability that is charged on

• property which is partly agricultural and partly non-agricultural, or

• agricultural property which has both agricultural and non-agricultural value.

In making this apportionment, treat growing crops, cultivations and unexhausted manures as part of the agricultural value of the agricultural property, even if they have been separately accounted for as personal estate (unless the amount involved is small).

Example

Trevor’s estate includes land and buildings with a total value of £1m. Of that £1m, £800,000 is the value of agricultural property which has an agricultural value of only £100,000 (the remaining £700,000 is development value). A mortgage of £600,000 is charged on the whole of the £1m land and buildings.

For the agricultural relief calculation, you should deduct from the agricultural value the proportion of the mortgage attributable to that value. The apportionment is

(£100,000 (agricultural value) ÷ £1,000,000) × 600,000 = £60,000

So, the value on which the relief is calculated is the agricultural value (£100,000) less the proportion of the mortgage (£60,000) = £40,000

When the death or transfer occurs on or after 17 July 2013, and any loans were taken out in connection with assets that qualify for agricultural (or business) relief on or after 6 April 2013, you should also consider whether the provisions of IHTA84/S162B apply. See IHTM28010 for an overview of the provisions and IHTM28021 when you are considering assets that qualify for agricultural relief, and IHTM28022 when the assets may qualify for both agricultural and business relief.

You should seek advice when it appears debts incurred for the farming business have been charged on assets which do not qualify for agricultural or business relief and/or where the relief claimed is greater than the net value of the farming business.