DET/47/2004

	LANDS TRIBUNAL ACT 1949
	
	TAX – Inheritance Tax – agricultural property relief – agricultural value – agricultural property – farmhouses – whether house occupied by “lifestyle” farmer could be farmhouse – held bid of such person could not represent agricultural value – Inheritance Tax Act 1984 s 115(2) and (3) 

IN THE MATTER OF A NOTICE OF REFERENCE

BETWEEN	LLOYDS TSB PRIVATE BANKING PLC	Appellant
	personal representative of Rosemary Antrobus deceased
	 
	and
	PETER TWIDDY	Respondent
	(Inland Revenue Capital Taxes)

	Re:	Cookhill Priory 
	Cookhill
	Warwickshire 
	B49 5LN

	Before: The President and Mr N J Rose FRICS

	Sitting at 110 New Bridge Street, London EC4V 6JL
	on 11, 12 and 13 July 2005

William Massey QC and James Henderson instructed by Morton Fisher of Worcester for the appellant
Philip Jones instructed by Solicitor of Inland Revenue for the respondent

The following cases are referred to in this decision:

Lloyds TSB (personal representative of Antrobus, deceased) v Inland Revenue Commissioner [2002] STC (SCD) 468
Lindsay v Commissioners of Inland Revenue (1953) 34 TC 289
Commissioners of Inland Revenue v John M Whiteford & Son (1962) 40 TC 379
Starke v Inland Revenue Commissioners [1994] STC 295
Inland Revenue Commissioners v Korner [1909] 1 All ER 679

The following further cases were cited in argument:

Inland Revenue Commissioners v Stenhouse’s Trustees [1992] STC 103
Higginson’s Executors v Inland Revenue Commissioners [2002] STC (SCD) 483
Dixon v Inland Revenue Commissioners [2002] STC (SCD) 53
Rosser v Inland Revenue Commissioners [2003] STC (SCD) 311
Starke v Inland Revenue Commissioners [1995] STC 689
Duke of Buccleuch v Inland Revenue Commissioners [1967] 1 AC 506

	DECISION
Introduction
1.	This is an appeal pursuant to section 222(1), (4) and (4B) of the Inheritance Tax Act 1984 as amended against a determination by the Commissioners of Inland Revenue under section 221 of that Act.  Under those provisions a person on whom a notice of determination has been served may appeal against the determination to the Lands Tribunal on any question as to the value of land.  The notice dated 18 February 2004 was served on Lloyds TSB Private Banking plc, the executors of Rosemary Antrobus, who at the date of her death, 22 June 2001, had been the owner of property known as Cookhill Priory, Cookhill, Warwickshire.  Under the provisions of the 1984 Act agricultural property attracts relief from inheritance tax (IHT).  The determination of the Commissioners was that part of the property, consisting of a dwelling-house and other land, had a market value in excess of its value as agricultural property.  The consequence of this is that IHT would be payable on the amount by which the market value as so determined exceeded the agricultural value.  In appealing against the determination the executors contend that the agricultural value was the same as the market value.
2.	We heard evidence and argument in the appeal on 11, 12 and 13 July 2005, and on 11 August 2005 we carried out an inspection of the property and of two other properties that had been cited as comparable evidence.  Following this we invited further representations in writing, and we received these between 9 September and 4 October 2005.
The property
3.	The property known as Cookhill Priory consisted at the death of Miss Antrobus of about 126 acres of land (see paragraph 15 below) containing a detached country house, agricultural buildings, buildings known as the Summer House and the Turret House, gardens and agricultural land. It is bounded on the east by the A441, which runs northwards to Redditch, 7 miles away.  From the A441, at a junction adjacent to the property, the A422 runs westwards to Worcester, 15 miles away.  Part of the property, containing 53.68 acres of agricultural land and all the buildings and including about an acre of garden, lies to the north of the A422.  The rest, 70.43 acres of agricultural land, lies to the south of this road.  It contains a telecommunications mast.  The two parcels of land are offset, the land to the south starting about 500 yards west of the junction and continuing for about 700 yards beyond the land to the north along the A422.  The history of the property was described fully in the decision of the Special Commissioner, Dr Nuala Bruce, in Lloyds TSB (personal representative of Antrobus, deceased) v Inland Revenue Commissioner [2002] STC (SCD) 468 (“Antrobus No 1”), to which we refer below.
4.	The house stands on the site of a mediaeval nunnery.  It dates in part from Tudor times.  An extension was added in 1765 and a chapel in 1783, and a further addition to the Georgian extension was made in 1910.  It is a Grade II* listed building.  The gardens lie mainly on the west side of the house and are not extensive.  The farm buildings are to the north.  One range of these, built in brick with a pitched tile roof, has been converted into dwelling houses, as we saw on our site inspection.  There is a substantial brick built farm building between these and the house, and further to the north-west are two large Dutch barns.  To the west of the house, beyond its gardens, is a single-storey building called the Summer House.  To the north-east, close to the A441 and with access directly from it, is the Turret House, an older building now undergoing renovation.  Surrounding the house and its garden is parkland containing some specimen trees, and there is a series of five small ponds.
5.	The property was put on the market for sale by auction in 1907.  The auction particulars described the property as a “small freehold country estate of exceptional historical and antiquarian interest” and gave a schedule of the land, which then amounted to 126 acres 2 roods and 14 perches.  On 21 September 1907 Mr Philip Antrobus, described in the conveyance as a manufacturing jeweller, purchased the property.  He was the father of Miss Antrobus, who in due course came to farm the land.  In 1942 her father granted her a tenancy of all the fields surrounding the house, and following his death in 1943 she continued to lease the land from his executors.  In 1957 a yearly tenancy was granted in substitution for that of 1942.  Miss Antrobus’s mother died in 1959, and the property was then conveyed to her.  From about 1991 onwards her farming operations consisted of sheep and cattle raising.  Barley was grown regularly and also potatoes and cabbages.  Eggs and geese were sold.  The accounts from 1991 to 2001 showed a loss in all years except two.  At the time of her death she was farming all the agricultural land forming part of the property plus 6.54 acres of tenanted land.
The statutory provisions and their effect
6.	Under section 4 of the Act Miss Antrobus was treated on her death, for the purposes of IHT, as making a transfer of value, with the value thereby transferred being equal to the value of her estate immediately before her death.  Her estate for this purpose was the aggregate of all the property to which she was beneficially entitled (section 5(1)).  To the extent that the value transferred was attributable to the agricultural value of agricultural property comprised in her estate, the value transferred was treated as reduced, for IHT purposes, by 100 per cent of such agricultural value (section 116(1) and (2)(a)).  The agricultural value of the agricultural property was thus wholly relieved from IHT.  To the extent that the value transferred was not attributable to the agricultural value of the agricultural property but was attributable to any land or building (or other asset) wholly or mainly used for the purposes of her business, the value transferred was treated as reduced by 100% of such business asset value.  The market value of assets wholly or mainly used in the business was thus wholly relieved from IHT to the extent that the value was not already relieved by agricultural property relief.
7.	We are not here concerned with business property relief.  The issue is the agricultural value of agricultural property that is attributable to the value transferred.  The issue falls to be determined on the basis of the following definition in the Act.  The value of property is defined as market value in these terms by section 160:
“Market value
Except as otherwise provided by this Act, the value at any time of any property shall for the purposes of this Act be the price which the property might reasonably be expected to fetch if sold in the open market at that time; but that price shall not be assumed to be reduced on the ground that the whole property is to be placed on the market at one and the same time.”
8.	“Agricultural property” is defined by section 115(2):
“(2)	In this Chapter ‘agricultural property’ means agricultural land or pasture and includes woodland and any building used in connection with the intensive rearing of livestock or fish if the woodland or building is occupied with agricultural land or pasture and the occupation is ancillary to that of the agricultural land or pasture; and also includes such cottages, farm buildings and farmhouses, together with the land occupied with them, as are of a character appropriate to the property.”
9.	“Agricultural value” is defined by section 115(3):
“(3)	For the purposes of this Chapter the agricultural value of any agricultural property shall be taken to be the value which would be the value of the property if the property were subject to a perpetual covenant prohibiting its use otherwise than as agricultural property.”
10.	It is also to be noted that under section 117, the relief conferred by section 116 cannot be claimed unless (a) the agricultural property was occupied by the transferor for the purposes of agriculture throughout the period of two years ending with the date of the transfer or (b) it was owned by him throughout the period of 7 years ending with that date and was throughout occupied (by him or another) for the purposes of agriculture.
The Special Commissioner’s decision
11.	The Commissioners of Inland Revenue determined that, in relation to the deemed disposal on Miss Antrobus’s death, the house, Cookhill Priory, was not a farmhouse of a character appropriate to the agricultural land or pasture which formed part of the deceased’s estate.  The personal representative appealed to the Special Commissioners against this determination.  The Inland Revenue accepted that at the date of Miss Antrobus’s death the house was a farmhouse, but they disputed that it was of a character appropriate to the property.  In Antrobus No 1 the Special Commissioner, Dr Bruce, determined the issue in favour of the taxpayer.
12.	Having recorded the evidence, including that of Miss Antrobus’s accountant, Mr Humphries, and that of Mr Clive Beer MRICS (to whom we refer further below), the Special Commissioner reviewed the authorities cited by the parties and set out her conclusion on them:
“48.	Thus the principles which have been established for deciding whether a farmhouse is of a character appropriate to the property may be summarised as: first, one should consider whether the house is appropriate by reference to its size, content and layout, with the farm buildings and the particular area of farmland being farmed (see IRC v Korner 1969 SC (HL) 13); secondly, one should consider whether the house is proportionate in size and nature to the requirements of the farming activities conducted on the agricultural land or pasture in question (see Starke v IRC [1994] STC 295, [1994] 1 WLR 888); thirdly that although one cannot describe a farmhouse which satisfies the ‘character appropriate’ test one knows one when one sees it (see Dixon v IRC [2002] STC (SCD) 53); fourthly, one should ask whether the educated rural layman would regard the property as a house with land or a farm (see Dixon); and finally, one should consider the historical dimension and ask how long the house in question has been associated with the agricultural property and whether there was a history of agricultural production (see Dixon).”
13.	Earlier the Special Commissioner had said this about Miss Antrobus:
“25.	…In evidence which I accept, Mr Humphries said that Miss Antrobus was a farmer in every sense of the word.  She would drive tractors, plough fields, carry out all husbandry duties, deliver calves and help at lambing.  She knew her stock and knew when to sell at the best prices.  The farmhouse was used just as any other farm building…”
14.	She went on to refer to “the unique nature of this property.”  The Georgian façade gave the impression from a distance of a house of greater importance than it was, and the whole property was in a poor state of repair and maintenance.  In Miss Antrobus’s lifetime the house was not used as a family home of distinction but as a working farm building.  The Special Commissioner accepted the evidence of Mr Beer that the house was comparable in size and layout with many other farmhouses within a wide area by reference to the particular area being farmed and where the farming activities, arable and stock, were similar in nature.  She concluded that the house was, at Miss Antrobus’s death, a farmhouse with a farm and definitely not a house with land.  As for the historical dimension, for 100 years there had been a history of agricultural production within the same family.  Applying the tests she had identified, therefore, the Special Commissioner concluded that the farmhouse, and the land occupied with it (which she treated as consisting of about 126 acres of freehold land and 6.54 acres of tenanted land), was of a character appropriate to the property within the meaning of section 115(2).
The issue
15.	It was agreed that the total market value of Miss Antrobus’s freehold interest in Cookhill Priory on 22 June 2001, the valuation date, was £1,323,500, made up as follows:
		       £	
(a)	The farmhouse and gardens 	608,475	
(b)	Chapel and farm buildings	56,525	
(c)	The Summer House 	70,000	
(d)	The Turret House	100,000	
(e)	70.43 acres agricultural land south of A422	211,000	
(f)	52.7 acres agricultural land north of A422	262,500	
(g)	Telecom mast site	     15,000	
		£1,323,500	

(Although these are the agreed values, the 52.7 acres at (f) is, more accurately, 52.68 acres, giving a total, with the 70.43 acres at (e) of 123.11 acres.  In addition there are the other parcels, and we take the overall total to be about 126 acres.  Areas of 122, 123, 124 and 126 acres, sometimes with decimal additions, were variously referred to in evidence and submissions, but no significance attaches to the precise figure in any context.)  It was also agreed that the agricultural value of parcels (c), (d) and (g) was nil and that the agricultural and market values of (b) and (e) were identical.  The agricultural value of (f) was not agreed, but it is not in issue because that land is entitled to business property relief.  The single issue that we are required to determine is the agricultural value attributable to the farmhouse.  The appellant contended that such value is £608,475 (the same as its market value), and the respondent’s figure was £425,932.50.  
16.	The basis for this disagreement was that the Inland Revenue contended that the effect of the covenant to be implied under section 115(3) was effectively the same as that of a standard agricultural occupancy condition (AOC) in a planning permission.  The standard AOC is in these terms: “The occupation of the dwelling shall be limited to a person solely or mainly working, or last working, in the locality in agriculture or in forestry, or a widow or widower of such a person, and to any resident dependants” (see Department of the Environment Circular no 11/95, para 45).  The appellant said that this was to construe the section 115(3) covenant too restrictively.  It contended that a farmhouse subject to a section 115(3) covenant could be occupied by any person who carried on the business of farming the surrounding farmland from the farmhouse, whether he was solely or mainly employed in agriculture or not.  The market for a farmhouse or farm subject to a section 115(3) covenant would thus include what was referred to as a “lifestyle” farmer, with a career elsewhere.  The value for which the appellant contended reflected the amount that such a person would have paid for the house.  The Inland Revenue’s value assumed that such a person would be excluded from the market to which regard was to be had. 
Factual evidence
17.	Andrew Grant FRICS, called by Mr William Massey QC for the taxpayers, gave evidence on the marketing of the property after Miss Antrobus’s death.  He said that he was the sole proprietor of the business of the same name which traded from offices in Worcester and seven other locations and was well known for negotiating sales of larger country properties.  Shortly after Miss Antrobus died, Mr Grant said, he was instructed by the appellant to prepare a valuation of Cookhill Priory and its contents for probate purposes and to advise on the disposal of the property.  At a meeting with the beneficiaries on 31 July 2001 it was decided that the Priory and all the land north of the A442  would be offered for sale as Lot 1 at  £950,000.  The 70 acres of agricultural land on the other side of the road would be marketed separately as Lot 2 and any purchaser of the Priory would be given the opportunity to buy them.  The purpose of lotting the estate in this way was to ensure that the entire market was covered.
18.	On 10 September 2001 the appellant gave Mr Grant formal instructions to proceed with the marketing of the property in two lots.  Three large For Sale boards were erected and the property was advertised in the local, regional and national press.  A good quality sales brochure was sent to all those who responded to the boards and advertisements, as well as to people on the selling agent’s mailing list.  The property was viewed by potential purchasers on 50 occasions between 11 October and 2 December 2001.  Of the people who were taken round by Mr Grant’s staff, there was only one couple who were described in the agent’s report on marketing as “builders” – that is, interested in converting the farmhouse and outbuildings to a number of houses for sale to separate buyers – and one person who was categorised as a “developer” – who intended to improve the farmhouse and re-sell it.  Mr Grant believed that the remaining people who viewed the property were “lifestyle or active farmers”. They were interested in the house and the land north of the road for their own occupation and some of them were interested in the land south of the road as well. 
19.	Early in November 2001 a Ms Bayliss offered £935,000 for Lot 1.  She intended to refurbish the house and the barns and then sell the property at a profit as a small country estate.  Because strong interest was being shown, Mr Grant agreed with Ms Bayliss that the property would not be removed from the market but that she would be given an opportunity to sign a contract within seven days of its receipt by her solicitors.  This spurred the interest of other potential purchasers.  Mr and Mrs Linton Connell made two higher bids.  On 22 November 2001 a sale to them at £1,035,000 was agreed and the documents relating to the sale to Ms Bayliss were withdrawn.  It was agreed that completion would take place three months after exchange of contracts to enable the purchasers to conclude the sale of their existing property.  The sale was in fact concluded in March 2002 and Mr and Mrs Connell took up residence later in the year, having sold their previous home and carried out works of refurbishment to the new property.  
20.	The sale to Mr and Mrs Connell did not include the Turret House or the 70 acres forming Lot 2.  Planning consent for the conversion of the Turret House to a private dwelling house was subsequently obtained and that property was sold on 18 November 2002 for £176,000.  The 70 acres were divided up into six lots.  These were eventually sold in two separate transactions, one part for £155,000 and the other (including the telecommunication mast) for £83,000.
21.	Malcolm Hawkesford FRICS, called by Mr Massey, gave evidence of his own interest in purchasing the property and of an offer that he had made for it.  He said that he was the managing director of Malcolm Hawkesford and Company, estate agents and surveyors, with offices at Leamington Spa, Warwick, Southam, Wellsborne and Stratford upon Avon.  He said that he first became aware of the impending sale of Cookhill Priory in the autumn of 2001.  He visited the property and was keen to acquire it as a home and a farming enterprise.  In addition to his professional practice he said that he bred specialised cattle at his home near Stratford, which included about 7 hectares of land.  
22.	Mr Hawkesford said that he visited the property by arrangement with Mr Grant on 1 November 2001.  Some time later he discovered that an offer for part of the property had been accepted, but he understood that the estate remained on the market.  He and his wife had fallen in love with the house and its surroundings.  He intended to farm much more seriously than he had done hitherto.  Because of the requirements of his main practice he would need to employ a retired farmer or similar person to undertake the day to day work on the farm.  He understood that the owners of the estate were still prepared to receive offers in early 2002.  He therefore made an offer on 31 January 2002 to buy the entire estate for £1,300,000.  He thought that the vendors might find it attractive to dispose of the entire holding in one sale.  If their offer had been accepted, Mr Hawkesford and his wife intended to convert the farm buildings into a small courtyard development of three or four residential properties, with a view to letting them and retaining the investment.  That would produce the added benefit of having other people living in what was a relatively lonely area.  They also intended to refurbish the farm house.  
23.	Mr Hawkesford was asked what would have been the effect on his interest if the house had been subject to a section 115(3) covenant.  He said that so long as he would have been free both to farm the land and carry on his business at his offices in the area, he did not think the covenant would have affected his offer.  If the property had been subject to an agricultural occupancy condition, however, he would not have been interested as he could not have complied with it.  His major source of income had to be from his work with his existing firm.
Expert evidence
24.	Clive Beer HND Agric Dip REM MRICS, called on behalf of the taxpayers by Mr Massey, said that he was a director of Savills Ltd.  He was formerly a farm manager and was currently responsible for his firm’s farm management consulting business practised from its office in Ledbury, Herefordshire.
25.	Mr Beer said that he considered that, in order to arrive at the agricultural value under section 115 (3), it was necessary to discount the open market value to reflect any actual or potential non-agricultural uses of the property to which additional value might be attributable.  He did not think that there were any such uses in the case of Cookhill Priory.  The land was of limited sporting value due to its type and topography, and any exploitation would be limited to rough “home” shooting of an uneconomic nature.  The only potential development comprised limited conversion of some of the farm buildings to commercial or residential use.  He thought, however, that such development value as there might be in these buildings would be offset by the diminution in the value of the farmhouse as a result of the loss of privacy which would accompany the introduction of different uses to the estate.  Although it would be possible for a developer to refurbish the farmhouse, the value attaching to that potential was part of the agricultural value.  In the same way works undertaken to improve the quality of the grazing land would also enhance its agricultural value.  Mr Beer was not aware of any value for mineral exploitation of the land which would enhance the value of the estate above its agricultural value.  Since he was unable to identify any other non-agricultural uses of the property which would be in conflict with a perpetual covenant prohibiting its use other than as agricultural property, he did not consider that any discount from market value should be made.
26.	Mr Beer said that in broad terms the agricultural property market was made up of two types of buyer.  Firstly, there was the commercial farmer interested in buying farmland, often to extend an existing business.  Such a purchaser might well pay a premium to reflect the location of the land.  Then there was the “lifestyle buyer”.  In recent times there had been an increase in the number of people wanting to purchase agricultural property because it offered an appealing lifestyle.  The objective of such people was to acquire, often for the first time, an agricultural estate of which the house was an integral part and which afforded an attractive private and secure home and lifestyle for the buyer and his family.  Such a purchaser would have little difficulty in using the land for agriculture himself rather than letting it out to others.
27.	There were at least three ways in which a lifestyle buyer could carry on a farming business without prior experience and without spending much time at the farm.  Firstly, the land could be farmed with the assistance of one or more employees, for example a farm manager, or through a contract farming arrangement.  Secondly, the land could be farmed in partnership with an active local farmer.  Thirdly, the new owner could come to a share-farming arrangement, whereby the landowner would grow grass or other crops for sale to a local livestock farmer, whose cattle or sheep would eat down the crop which he had bought in situ.  Whichever of these methods was adopted by the lifestyle farmer, the farmhouse would continue to be occupied by him and used as agricultural property.
28.	There was also a strong fiscal incentive to use the land in this way.  The farmland could be used as a shelter from capital gains tax by rolling over business assets.  In addition, the agricultural property so used (including the “character appropriate” farmhouse) was exempt from inheritance tax on its agricultural value after two years ownership and occupation for agricultural purposes.  The land would also be eligible for business property relief on any development value.  These taxation advantages had had a great influence on demand in the agricultural property market.  Mr Beer did not think that a covenant not to use otherwise than as agricultural property would have had an adverse effect on the value of such property which had no development, hope, sporting or other alternative use value.  A commercial farmer might outbid others in order to obtain land neighbouring his existing landholding.  It was, however, unlikely that he would adopt such an approach towards the purchase of a farmhouse.  The lifestyle buyer, on the other hand, was interested in buying privacy which would be afforded by buying a farmhouse with its surrounding land and this fact would enhance the value of such a holding.  The tax benefits were an added advantage.  In Mr Beer’s opinion Cookhill Priory was a classic property of the type which would have attracted the “lifestyle farmer” market in June 2001.  That was what in fact happened a few months later when it was sold to a lifestyle buyer.  There was also interest from two under-bidders, one of whom was interested in refurbishing and putting the estate back on the lifestyle farmer market, the other being interested in the estate as a lifestyle farmer himself.
29.	Mr Beer thought that a lifestyle buyer wanting privacy, far from being put off by a perpetual covenant prohibiting use otherwise than as agricultural property, could welcome such a restriction.  He could buy safe in the knowledge that the holding could never be used for any other purpose which might affect its privacy or enjoyment.
30.	Mr Beer referred to the Valuation Office Inheritance Tax Manual “Practice Note 10, Part 2: Assessment of Agricultural Value.”  In paragraph 4, headed “Exclusion of non-agricultural residential value”, the note said:
“Some prospective purchasers of a farm may be interested in it mainly because of the attractiveness of the farmhouse as a residence or for some other reason not directly connected with agriculture.  In such circumstances, they may be prepared to pay a price above the level which would be achieved if the property were subject to the perpetual covenant of s115(3).  This higher price may be obtained even if the successful purchaser intends subsequently to farm the land.  Location is an important factor in valuation.  It is usually houses situated within easy travelling distance of conurbations where the market value is most likely to exceed the agricultural value.
Some analogy may be drawn with an agricultural planning tie.  Such a tie, however, may be less restrictive as occasionally it can be lifted whereas s115(3) assumes a perpetual restriction.  The caseworker must follow the market and be wary of ‘rule of thumb’ discounts.  Whilst it is arguable that the existence of any restriction on use would tend to reduce the value, the caseworker should seek only to distinguish between the agricultural value and the open market value as defined in s160 when there is evidence to support a difference or a clear prospect of some non agricultural use.”
31.	Mr Beer disagreed with these guidelines.  The proximity of a farmhouse to a conurbation did not mean that the price it realised in the market was different from its agricultural value.  For example, a potential lifestyle farmer might wish to buy a farm with farmhouse in Berkshire and carry on a farming business in one of the relatively easy ways he had described, whilst pursuing a profitable career in London.  The fact that in such circumstances the market was bid up by lifestyle purchasers was entirely a product of the agricultural value of the property.  
32.	Mr Beer also disagreed with the Valuation Office’s suggestion that an analogy could be drawn between the perpetual covenant under section 115(3) and an agricultural planning restriction.  The latter prevented a farmhouse being used other than by a person who was solely or mainly employed in farming.  On the other hand a purchaser of a property with a section 115(3) restriction might spend 95% or more of his working time elsewhere and still use the property as agricultural property in compliance with the perpetual covenant.  
33.	Mr Beer said that he was not aware of any market evidence which could demonstrate the effect on value of a perpetual section 115(3) covenant.  The fact, however, that a farmhouse and farm were eligible for agricultural property relief from inheritance tax must give rise to a comparative advantage over an identical property without such benefit.  It was reasonable to assume that the market would act prudently.  Any purchaser would prefer a property potentially benefiting from agricultural property relief to one that did not.  In such circumstances property which would potentially benefit from agricultural property relief must top the lifestyle farm market, given the potential 40% tax saving.  The resultant premium value was pure agricultural value, in that it was associated with agricultural property benefiting from agricultural property relief.  Mr Beer could not envisage a situation where the agricultural value of property with this benefit and with no development, hope, sporting or mineral value could ever be less than its market value, given the substantial comparative advantage enjoyed by such a property. 
34.	Timothy David Swallow MRICS, called by Mr Philip Jones for the respondent, said that he was employed by the Valuation Office Agency as a senior valuer in the Worcester office of District Valuer Services Central, which covered the majority of Herefordshire and Worcestershire.  He said that he had valued many agricultural properties and was familiar with the locality and the market at the valuation date.
35.	In Mr Swallow’s opinion the agricultural value of Cookhill Priory – excluding the chapel and outbuildings – was £425,932.50, which was 30% less than its agreed market value.  This opinion was based on advice he had received to the effect that the section 115(3) covenant could never be lifted and required the hypothetical purchaser to continue to occupy the house as a farmhouse, together with sufficient agricultural land or pasture to make the house of a character appropriate to the land.  The discount from market value would vary depending upon the circumstances of the case.  In the light of this advice, Mr Swallow assumed that the house must continue to be occupied as a farmhouse together with the 122.15 acres of land with which it had been occupied by Miss Antrobus.  The purchaser was therefore most likely to be a working farmer, mainly engaged in agricultural operations on the land.
36.	Cookhill Priory was situated in an area that was attractive to wealthy individuals seeking easy communication with the West Midlands conurbation and further afield to the south-east.  Mr Swallow considered that these people would be interested in the farmhouse as their main or weekend residence.  The effect of a section 115(3) covenant would be to exclude them from the market.  Restricting demand to full time working farmers would result in the price realised for the residence being significantly less than it would otherwise have been.
37.	Mr Swallow attempted to estimate the profit that a formerly non-farming purchaser might make by farming the land in a similar way to that adopted by Miss Antrobus.  He concluded that it would be extremely difficult to run the holding at a profit.  A non-farming purchaser would have to acquire the land south of the road that he did not really want at an additional cost of £223,500.  If this sum had been borrowed at the valuation date on a 25 year repayment mortgage the payments, assuming an interest rate of 6%, would have been approximately £17,316 per annum.  Any non-farming purchaser would be more inclined to use the purchase price of the 70 acres to acquire a larger house with a smaller area of land that was free from any restrictive covenant.  If he were tempted to bid for Cookhill Priory subject to the user restriction, he would certainly expect a large discount from its unrestricted market value.
38.	In the course of cross-examination Mr Swallow accepted Mr Beer’s view that, by the use of a joint farming venture, it would be possible for the landowner to make a net profit of £4,640 from the entire holding on both sides of the road.  He reiterated, however, that this was an extremely modest return on the investment involved.  
39.	Since there was no open market evidence of properties subject to a section 115(3) restriction, Mr Swallow had regard to sales of properties subject to an agricultural occupancy condition imposed by the local planning authority and to valuations agreed in other inheritance tax cases.  Properties subject to AOCs generally sold at discounts ranging between 25% and 40% below their unrestricted market value.  The maximum discount applied when a property was particularly attractive to bidders who were excluded from the market by the terms of the AOC, since  the local planning authority was known to enforce the covenants strictly in the area and there was little or no hope of the covenant ever being lifted.  Mr Swallow produced details of two properties in Herefordshire which had been originally offered for sale subject to an AOC and which, having failed to find a buyer, were subsequently sold free of such a restriction.  These showed discounts of at least 35% in the case of one property sold with 6.45 acres of agricultural land and 50% where no agricultural land was included in the sale.  Mr Swallow also referred to the sale of a property known as Burnums Farm in Watford, Northamptonshire, which was sold subject to an AOC together with 101 acres of agricultural land.  By reference to the prices achieved for two unrestricted properties in Watford, Mr Swallow calculated that the price paid for Burnums Farmhouse was 35.1% less than its full open market value.
40.	As for “agricultural values” which had been agreed for inheritance tax purposes, Mr Swallow felt that they should be given more weight than was usually accorded to settlement evidence because of the complete absence of open market sales of properties subject to a section 115(3) covenant.  The majority of cases which had been agreed by district valuers across the country incorporated discounts of between 25% and 33%.  Mr Swallow produced details of two such settlements in Northamptonshire, one relating to Manor Farm, Naseby, and the other in respect of Hall Farm, Glendon.  The former comprised 217.9 acres and the latter 128.88 acres and the agreed agricultural values of the farmhouses and immediately adjoining land were respectively 33.4% and 23.6% below market value.  
41.	Mr Swallow accepted that the size of the discount would depend on the particular circumstances.  He considered that what should be excluded from the agricultural value was the overbid for the farmhouse, with a small area of land adjoining, from non-farming residential purchasers.  The amount of this overbid would depend on factors such as the location and attractiveness of the house and its setting, including the views it enjoyed.  It might range from nothing to possibly something well in excess of the rate he had adopted in this particular case. 
Submissions
42.	Mr Massey submitted that the evident purpose and effect of section 115(3) was to confine the value to which agricultural property relief was applicable to the current use value of the agricultural property and to take out of such relief the value attributable to a planning permission for a change of use or to any hope of such permission.  The Inland Revenue were wrong to equate the effect of the covenant to be assumed under section 115(3) with that of an agricultural occupancy condition.  A lifestyle farmer, managing the farming of the land in one of the ways described by Mr Beer, would satisfy the terms of the assumed covenant.
43.	Mr Massey noted that there was no definition of “farmhouses” in section 115(2), and the term must therefore bear its ordinary meaning in its context.  The Shorter Oxford Dictionary defined a farmhouse as: “1. A dwelling-house attached to a farm; spec. the chief such dwelling-house.”  The following matters were relevant to the context.  Section 115(2) was concerned primarily with a type of property rather than the purpose for which it was occupied.  It defined the type of property that was eligible for relief.  It was section 117 that prescribed the further requirement of occupation for agricultural purposes for a sustained period.  The agricultural property must have been occupied for agricultural purposes either by the owner, the transferor, for a minimum period of two years’ owner occupation (section 117(a)) or by another, in which case the owner must have owned the property for a minimum of 7 years (section 117(b)).  The effect of sections 116(1), (2)(c), and 117(b) was that a freehold owner of an agricultural holding let to a third party would obtain relief at 100% if he had owned the freehold for 7 years and the holding had been occupied by the tenant for agricultural purposes throughout that time.
44.	On its ordinary meaning and in the context in which it appeared, said Mr Massey, “farmhouse” carried no connotation that it would be occupied by someone who was on the premises during the working day.  In particular there was no authority for the submission made on behalf of the Inland Revenue that the house must be occupied by the person who was managing the farm on a day to day basis.  Whilst the house must be occupied by the proprietor of the business and the farm must be managed from there, modern farming methods did not require his daily presence.  Farming businesses were carried on in many different ways.  Current farming methods allowed proprietors to delegate to outside contractors all of the physical tasks involved in farming activities and the supervision of those tasks.  In such circumstances the farm was no less a farm, the business carried on was no less a farming business, and the farmhouse remained no less the farmhouse.  The Inland Revenue accepted that farming businesses could be carried on by an owner through such mediums as short term grazing lets, share farming and contract farming.  Those were ways that allowed a proprietor fully to delegate the day to day physical farming activities to others, leaving him to decide policy matters, the overall management of the business, and to deal with regulatory requirements, the preparation and maintaining of accounts for tax and VAT and other records for the purpose of obtaining agricultural grants and subsidies.  Those matters too might be delegated to accountants and other consultants, so that the actual time spent by the proprietor on his business might be small.  The farm would, however, remain a working farm and the farmhouse would remain the farmhouse of that farm from which the farm was managed by the proprietor.
45.	Mr Jones submitted that to be a farmhouse the dwelling in question must be occupied by the person who was managing the farm on a day to day basis.  To qualify for relief the farmhouse must be of a character appropriate to the land being farmed, so that if insufficient land were retained there would be a danger that the farmhouse would become nothing more than a rich man’s considerable residence with some land attached.  In our request for further submissions we had drawn attention to the change in the relief granted under the Finance Act 1894 and that in the present legislation, which stemmed from the Finance Act 1975.  The former had included in the list of buildings constituting agricultural property “mansion houses”, but these were omitted from the list in the replacement provisions contained in the 1975 Act.  Mr Jones said that this highlighted the distinction between a working farmer, who lived in a farmhouse, and a landed proprietor, who lived in a mansion house.  The latter might still technically carry on a farming business, in that his land would be used for the growing of crops etc, but that did not mean that his dwelling house was a farmhouse.
46.	In judging whether a dwelling was a farmhouse of a character appropriate to the agricultural land in question, said Mr Jones, one must have regard to the agricultural use of the land.  It was the Inland Revenue’s case that although Cookhill Priory with its 123 acres, farmed as it was by Miss Antrobus, might be a farmhouse of a character appropriate to the 123 acres of land it did not follow that Cookhill Priory, as used by a lifestyle farmer would remain a farmhouse of a character appropriate to the 123 acres of agricultural land.  A lifestyle farmer, as described by the appellant, was someone with another full-time career who entered into a share farming or contract farming arrangement.  In other words the principal, or day to day, farming activities were carried on by someone else.  Mr Beer had set out three ways in which someone might carry on a farming business “without much experience or without spending much time at all on the business”.  The fact that this might qualify for some purposes as the carrying on of a farming business, and thus confer certain tax benefits on the owner of the land, did not mean that the dwelling house could in any meaningful sense be described as a farmhouse of a character appropriate to those activities.
Discussion
47.	The fundamental issue between the parties was as to the effect of the covenant that is to be assumed under section 115(3).  Mr Beer’s assumption was that, if the house were occupied together with the land by a person who carried on a farming business on the land, the covenant would be satisfied, even though the person might spend 95% of his working time elsewhere.  Mr Swallow’s assumption was that the covenant was equivalent to a standard planning AOC with no prospect of release. 
48.	The covenant that is to be assumed under section 115(3) is one prohibiting the use of the property other than as agricultural property.  Under subsection (2) agricultural property means agricultural land, including “all cottages, farm buildings and farmhouses, together with the land occupied with them, as are of a character appropriate to the property.”  As far as the house in the present case is concerned it would constitute agricultural property if it was a farmhouse but not otherwise.  In Antrobus No 1 there was no dispute that the house was a farmhouse.  That was conceded by the Inland Revenue, as we have noted previously.  But the concession was made in the particular circumstances of Miss Antrobus’s occupation of the house and land, including in particular her active farming of the 123 acres of freehold agricultural land and the 6.54 acres of leased land.  In the present case it was accepted on behalf of the taxpayers that the house would only be a farmhouse if it was occupied with the whole of the 123 acres of agricultural land or an area not materially less than this.  Mr Beer’s assumption was that it would remain a farmhouse if purchased by someone who carried on a farming business on the land, even though he might spend very little of his time actively engaged in the business.  Thus those whom Mr Beer characterised as lifestyle farmers would have been unaffected by the covenant since the nature of their intended use of the property would have complied with it; and, since they would in his opinion have been the highest bidders in the market, the agricultural value of the property would have been the amount that the highest bidder among this category of buyers would have paid.
49.	In our judgment Mr Beer’s assumption was incorrect.  A farmhouse is the chief dwelling-house attached to a farm, the house in which the farmer of the land lives.  There is, we think, no dispute about the definition when it is expressed in this way.  The question is: who is the farmer of the land for the purpose of the definition in section 115(2)?  In our view it is the person who lives in the farmhouse in order to farm the land comprised in the farm and who farms the land on a day to day basis.  It is likely, although it may not necessarily always be the case, that his principal occupation will consist of farming the land comprised in the farm.  We do not think that a house occupied with a farm is a farmhouse simply because the person living there is in overall control of the agricultural business conducted on the land; and in particular we think that the lifestyle farmer, the person whose bid for the land is treated by the appellant as establishing the agricultural value of the land, is not the farmer for the purpose of the provisions.  There are a number of pointers that suggest that this is the correct view.
50.	The first pointer is the qualification in the subsection, that the farmhouse must be “of a character appropriate to the property”.  If the property were indeed such that it could be expected to be occupied by a lifestyle farmer – 100 acres, say, of extremely beautiful and secluded Green Belt land, within easy reach of a station providing ready commuting to the City of London – what character of house would be appropriate and how would this be determined?  On one view, a grand and well-appointed house would be appropriate, with bedrooms and bathrooms for visitors, a wine cellar, and large and comfortable day-rooms.  After all the owner of the property could be expected to be a wealthy man, who might, like Mr Beer’s exemplar, spend 95% of his working life in the city.  He, or others like him, would always outbid the professional farmer who would look to the profits of the farm to derive his living.  If, however, it is not the correct approach to consider appropriateness in terms of the nature of the property and its likely occupier, what is the correct approach?  It seems to us more likely that the correct approach is to seek to establish some commensurateness between, on the one hand, the land as agricultural land, and in particular the nature of the agricultural operations on it and its profitability, and, on the other hand, the house; and if this is so it can only be because the concept of the farmhouse is as the dwelling of a working farmer who requires a suitable house to support his working life. 
51.	Secondly, the statutory antecedents of section 115(2) are in our view of some significance.  The Finance Act 1894 imposed estate duty on the estate of a deceased person based on the value of the property, but section 7(5) limited the value of agricultural property to twenty-five times its annual value.  “Agricultural property” was defined in section 22(1)(g) as follows:
“The expression ‘agricultural property’ means agricultural land, pasture and woodland, and also includes such cottages, farm buildings, farm houses and mansion houses (together with the lands occupied therewith) as are of a character appropriate to the property.”
52.	Section 23 of the Finance Act 1925 introduced a reduced rate on the agricultural value of agricultural property (as defined in section 22(1)(g) of the 1894 Act).  Section 23(2) defined “agricultural value” as follows:
“For the purposes of this Section the agricultural value of agricultural property shall be taken to be the value which the property would bear if it was subject to a perpetual covenant prohibiting its use otherwise than as agricultural property, decreased by the value of any timber, trees, wood or underwood growing thereon.”
53.	The Finance Act 1975 abolished estate duty and introduced capital transfer tax.  Agricultural property relief, related to the agricultural value of the property, was provided for in Schedule 8.  Paragraph 8 of this Schedule, dealing with agricultural value, was in the same terms as section 115(3) of the 1984 Act.  Paragraph 7, defining agricultural property, was slightly different from section 115(2).  It provided:
“In this Schedule ‘agricultural property’ means agricultural land or pasture and includes woodland if occupied with agricultural land or pasture and the occupation is ancillary to that of the agricultural land or pasture and also includes such cottages, farm buildings and farm houses, together with the land occupied with them, as are of a character appropriate to the property.”
54.	Under paragraph 3(1)(a) and (2) of the Schedule relief was conditional on the transferor having been for not less than 5 out of the previous 7 years wholly or mainly engaged in any of the following capacities:
“(a)	a person who carries on farming as a trade either alone or in partnership;
(b)	a person employed in farming carried on as a trade by another person;
(c)	a director of a company carrying on farming in the United Kingdom 
as its main activity; or
(d)	a person undergoing full-time education.”
Under paragraph 3(1)(b) it was a condition that the agricultural property should have been occupied by the transferor for the purposes of agriculture for at least two years before the transfer.  Under sub-paragraph (3) the capacity requirement was satisfied if not less than 75% of the transferor’s relevant income was derived from agriculture in the United Kingdom.
55.	The fundamental difference between the definition of agricultural property in section 22(1)(g) of the 1894 Act on the one hand and the definitions in paragraph 7 of Schedule 8 to the 1975 Act and section 115(2) of the 1984 Act on the other was the omission of “mansion houses” from the latter.  The mansion house, the principal house of a country estate, would be lived in by the owner of the estate, and he might take no active part at all in the agricultural business of the estate, leaving it entirely to an agent.  The exemption contained in the 1894 Act was thus an exemption for country estates.  The omission of “mansion house” can be seen to have changed radically the nature of the exemption, and it seems likely, in our judgment, that the objective must have been to confine the exemption to the operational components of agricultural units.  This suggests to us that to qualify as a farmhouse for the purposes of the present provision a house must be occupied by a working farmer.
56.	It was pointed out by Mr Massey that the capacity requirement in paragraph 3 of the 1975 Act, which, he said, imposed a working farmer condition, was removed by the replacement provisions for agricultural property relief in Schedule 14 of the Finance Act 1981, the predecessor to Part V Chapter 2 of the 1984 Act.  In the 1981 and 1984 Acts, he said, Parliament could have made the distinction between the working farmer and the landed proprietor, but it did not do so.  We do not, however, consider that the capacity requirement in the 1975 Act impinges on the proper construction of “farmhouses” in that Act or the later Acts, any more than it impinges on the construction of “cottages” and “farm buildings”, the other buildings specifically included alongside farmhouses within the definition of agricultural property.  The purpose of the requirement was concerned with who was to be entitled to relief, and it was in our view unrelated to the question of what constituted agricultural property.   
57.	Thirdly, we think it significant to note those other elements of the definition to which we have just referred – cottages and farm buildings.  “Cottages” fairly obviously, we think, means farmworkers’ cottages.  (Under the 1894 Act the meaning might, we think, have been wider, so that it might have included, for instance, gamekeepers’ cottages, or the cottages of gardeners employed in the mansion house gardens: but we have no need to reach a view on this.)  We do not think that, under section 115(2), in our 100-acre farm example, the cottage of a gardener employed full time in the garden of the city worker’s house, could conceivably be exempt.  Nor do we think that, if the gardener devoted 5% of his time to farm work, his cottage would be a cottage for the purposes of the definition.  What is in contemplation, we believe, is a cottage occupied by an employee for the purpose of his employment in the agricultural operations on the land.  Similarly, although this is slightly different, we do not think that buildings on a farm, used to a minor extent for agricultural purposes but principally for car repairs, would be “agricultural buildings” within section 115(2).  These considerations, therefore, in our view support the concept of the farmhouse as the house of the person who manages the farm on a day to day basis and lives in the house in order to do so.
58.	The Inland Revenue’s approach, as we have said, was to treat the section 115(3) covenant as equivalent to a standard planning AOC with no prospect of release.  The standard AOC limits the occupation of the dwelling to a person solely or mainly working, or last working, in the locality in agriculture or in forestry, or a widow or widower of such a person, and to any resident dependants.  Three features of this condition are to be noted.  The first is that the restriction is unconnected to the occupation or use of any particular agricultural land and is related to the occupier’s employment in agriculture “in the locality”.  Under section 115(2) and (3), on the other hand, the restriction is to be treated as attaching to the property and the assumption is of a single occupation of the property.  Secondly, the planning condition includes as acceptable occupiers those “last working” in agriculture and their widows and widowers.  In this respect it is clearly less restrictive than the section 115(3) covenant, although we do not think that a farmhouse would automatically cease to be a farmhouse for the purposes of section 115(2) if, for instance, the farmer who had lived there for many years retired but continued to live in the house or if he died and his widow continued to live there; and the same would go for a cottage and a farmworker.  But it is possible that there could come a point at which, because of the length of time that had elapsed since a retirement or a death, the house could no longer be considered to be a farmhouse or a cottage.  
59.	Both those features of the AOC condition are ones that are less restrictive than the section 115(3) covenant.  The third feature also makes it less restrictive.  It is that an OAC can be removed by the grant of planning permission.  The Section 115(3) covenant by contrast is permanent.  Overall we do not think that the Inland Revenue is wrong in treating the section 115(3) covenant in relation to farmhouses as equivalent to the standard planning AOC for the purpose of establishing values.  Indeed, in the light of the features we have mentioned, the assumption is a conservative one
60.	There are no authorities that address directly the meaning of farmhouse and the effect of section 115(3) in the sort of context that applies in the present case.  We were referred to a number of decisions of the Special Commissioners in relation to agricultural property relief, but they were not directed to these matters.  Some assistance can, we think, be obtained from two Scottish cases.  In Lindsay v Commissioners of Inland Revenue (1953) 34 TC 289 the Court of Session upheld a decision of the Commissioners that the only dwelling-house on the sheep farm of a tenant resident abroad was a farm-house within the meaning of section 33 of the Income Tax Act 1945 where the tenant had appointed agents to conduct affairs relating to the farm and the house was lived in by the shepherd employed by them.  The shepherd had two sons who also lived in the house and who were employed on the farm.  At 292 Lord Carmont said:
“The Commissioners had, I think, sufficient to enable them to reach the conclusion that the premises in question were the farm-house of this farm.  The farm-house does not, as I understand it, cease to be the farm-house merely because the person conducting the farm is not the farmer himself but a person to whom he delegates the function of running the farm, as in this case the shepherd who is employed on his behalf to run it.  It seems to me that the Section contemplated a building used by the person running the farm as being the farm-house…”
61.	This interpretation of “farmhouse” was applied in another decision of the Court of Session, Commissioners of Inland Revenue v John M Whiteford & Son (1962) 40 TC 379.  The case concerned a farm that was farmed by a father and son in partnership.  They had both lived in the original farmhouse, but a new house was built to house the son.  The issue, under section 314 of the Income Tax Act 1952, was whether the newly-built house was a farmhouse or an agricultural cottage.  If it was a cottage the whole of the expenditure on it could be claimed as an allowance, but if it was a farmhouse only one-third could be claimed.  It was held to be a cottage.  At 383-4 the Lord President, Lord Clyde, having referred to the interpretation in Lindsay, said:
“Obviously, except in some very special case, a farm can only have one farmhouse from which the business is run.  In the present case, it appears to me to be clear that the father’s house is the farmhouse for the purpose of the present farm, for according to the findings, his house is the place from which the farm operations are conducted.”
He rejected the Crown’s contention that the new house could not be an agricultural cottage because the son was not an employee but a partner.  He went on:
“In my view the status or employment of the occupier of the premises is not the test, and the proper criterion is the purpose of the occupation of the premises in question.  Here, indubitably, the purpose of the occupation of this ‘Dorran’ house is husbandry, for under the partnership agreement the son for whom it was built and who occupies it must give his whole time and attention to the business of the partnership.  Upon that test, therefore, it seems to me clear that the ‘Dorran’ house in question is an agricultural cottage within the meaning of section 314…”
62.	Thus the house lived in by the person running the farm was regarded as the farmhouse for the purposes of the provision.  In each case it appears that what was held to be the farmhouse was lived in by the person for whom farming the land was his principal occupation, although this fact did not enter into the court’s reasoning.  In Whiteford the son was obliged to work full time on the farm, and this was treated as determinative of the house being an agricultural cottage.  It is also significant, in our view, that the proper criterion of whether the house was an agricultural cottage was said to be the purpose for which the house was occupied.  We think that this criterion would also be relevant in relation to a farmhouse, so that a house would only be a farmhouse if the purpose of its occupation was the running of the farm.  It seems unlikely that this criterion would be met in the case of a part-time farmer.
63.	One judicial dictum from the High Court is to be noted.  In Starke v Inland Revenue Commissioners [1994] STC 295, Blackburne J had to decide whether property containing buildings was “agricultural land or pasture” within section 115(2).  He held that it was not.  His reasons included the following:
  “4. If cottages farm buildings and farmhouses which are occupied and used for the purposes of agriculture fall within the meaning of agricultural land it is difficult to see what the point is of the ‘character appropriate’ requirement in limb (3).  If, however, cottages, farm buildings and farmhouses, together with any land occupied with them, are not within the expression ‘agricultural land or pasture’ but will constitute ‘agricultural property’ if used in connection with agricultural land or pasture provided that they are of a character appropriate to such agricultural land or pasture (that is, are proportionate in size and nature to the requirements of the farming activities conducted on the agricultural land or pasture in question) then it is possible to attribute a full meaning to that limb.”
64.	Mr Massey submitted that the judge’s interpretation, in the words in brackets, of the “character appropriate” requirement was not correct.  We disagree.  Although the judge was not aiming at an interpretation of the requirement for the purpose of his decision but was, it appears, simply providing a helpful paraphrase to aid an understanding of the provisions as a whole, we have no hesitation in accepting it as correct.  It lends support, in our view, to the meaning that we attach to farmhouse and to the first of the pointers we have discussed above.      
65.	Another dictum, this time in the House of Lords, requires consideration.  In Inland Revenue Commissioners v Korner [1909] 1 All ER 679 the issue was whether expenditure on the maintenance of a house was deductible for the purpose of income tax assessment.  The taxpayers, Professor Korner, his wife and three children jointly owned the 1,817 acre Elrig estate in Wigtownshire.  It consisted of five farms, one of which was let, and the other four of which were farmed in partnership by the taxpayers.  There were on the estate five houses, each of which went with one of the five farms.  There was in addition the principal dwellinghouse, the House of Elrig, and Professor Korner and his wife lived there.  The house had a substantial number of rooms, but they only used some of them.  Professor Korner exercised overall control of the farming enterprise by keeping statistics relating to it and by close financial control.  He spent approximately an hour a day on the business, but on odd occasions up to five or six hours.  A substantial local farmer was employed as factor to control the day-to-day farming activities by giving instructions to the four foremen employed by the Korner family.  He kept the ordinary farm records and books of partnership.
66.	Under section 124(1) of the Income Tax Act 1952 it was provided that:
“All farming and market gardening in the United Kingdom shall be treated as the carrying on of a trade … and the profits and gains thereof shall be charged to tax under Case I of Schedule D accordingly.”
Section 137 of the Act provided:
“Subject to the provisions of this Act, in computing the amount of the profits or gains to be charged under Case I or Case II of Schedule D, no sum shall be deducted in respect of … (b) any disbursements or expenses of maintenance of the parties, their families or establishments or any sums expended for any other domestic or private purposes distinct from the purposes of such trade, profession or vocation”.
Section 526 of the Act defined what was meant by farming:
“…‘farm land’ means land in the United Kingdom wholly or mainly occupied for the purposes of husbandry, not being market garden land, and includes the farmhouse and farm buildings, if any, and ‘farming’ shall be construed accordingly”.
67.	The issue in the case was whether section 137(b) had application so as to prevent the full costs of repairs, rates and insurance on the House of Elrig being set off against the receipts of the farming enterprise.  The Court of Session on appeal from the Special Commissioners held that the full costs could be set off, and this decision was upheld by the House of Lords.  The Special Commissioners had said that they were not satisfied that the House of Elrig was “the farmhouse” within the meaning of section 526(1).  But for the purposes of their decision they had accepted that it was, without deciding the point.  The Court of Session and the House of Lords proceeded on the same assumption, since the Inland Revenue made the concession that it was a farmhouse.  It was held (see Lord Guest at 684H-685A) that once a house qualified as a farmhouse it became farm land and thus part of the trading assets of the business, just as the fields were, so that repairs, rates and insurance were expenses of the trade of farming and were not expenses for private or domestic purposes.
68.	Of relevance to the present case are certain observations of Lord Upjohn at 687 D-F.  he said:
“My Lords, the Special Commissioners in the Case Stated said that they were not satisfied that the House of Elrig was ‘the farmhouse’, within the meaning of the Income Tax Act 1952, of the land occupied for the purposes of husbandry by the Korner family.  In its Case before your Lordships’ House the Crown said that it shared those doubts but was prepared to make the concession, so your Lordships are not directly concerned with the question .  But I think it right to say that I am no more satisfied than were the Special Commissioners that this house could properly be described as ‘the farmhouse’ within s.526.  This is a matter of fact to be decided in the circumstances of each case, and I would think that to be ‘the farmhouse’ for the purposes of the section it must be judged in accordance with ordinary ideas of what is appropriate in size, content and layout, taken in conjunction with the farm buildings and the particular area of farmland being farmed, and not part of a rich man’s considerable residence; I say that without reference to the facts of this case.”
69.	These observations could be said to lend some support to the taxpayer’s contentions in the present case, since it is implicit that Lord Upjohn considered that the fact that Professor Korner only spent an hour a day on the farming business and left the management of it to a factor did not prevent the House of Elrig from being a farmhouse.  However, the observations were obiter, on a point that had not been argued, and they related to a different statutory provision from the one with which we are concerned.  At the time of the decision, moreover, the estate duty definition of agricultural property, which included mansion houses as well as farmhouses, was still extant, so that if (as is inferable by his reference to appropriateness) Lord Upjohn had this definition in mind in expressing himself as he did his observations were made in a context that has since changed, as we think, fundamentally.
70.	Mr Massey contended that the purpose and effect of section 115(3) was to confine the value to which agricultural property relief was applicable to the current use value of the agricultural property and to take out of such relief the value attributable to a planning permission for a change of use or to any hope of such permission.  We do not think, however, that the purpose is related to planning.  As we have said, we consider that the purpose is to accord relief to the operational components of agricultural units.  Nor do we accept Mr Massey’s argument that the provisions of section 117, which prescribe the requirement of occupation for a sustained period and relate to both owner-occupied and tenanted land, suggest that the less restrictive construction of the section 115(3) covenant is to be preferred.  We cannot see that this provision points in one direction rather than the other. 
71.	In our judgment a farmhouse for the purposes of section 115(2) is the house of the person who lives in it in order to farm the land comprised in the farm and who farms the land on a day to day basis.  The agricultural value of the house in the present case therefore falls to be determined on the assumption that the perpetual covenant to be implied by virtue of section 115(3) would have prevented its use other than in this way.  This would have excluded, therefore, the lifestyle purchaser whose principal reason for living in the house was the amenity afforded by it and by the land.  We now turn to the question of value.
Conclusions on value
72.	We were not provided with any evidence of the sale on the open market of farmhouses subject to a covenant in the same terms as that in section 115(3), and we imagine that none exists.  The evidence before us comprises properties offered on the open market subject to an AOC and settlements which the Inland Revenue have reached with taxpayers for inheritance tax purposes.
73.	Mr Swallow referred to three properties subject to an AOC.  Two were situated in Herefordshire, namely “Crickadarn”, Thruxton, and 2 Langdon Villas, Peterstow.  The former is a modern four bedroom detached property on 6.45 acres and the latter is a post-war semi-detached dwelling with three bedrooms, in a garden of less than one acre with no agricultural land attached.  In both cases it is clear that, because of the very small area of land to be included in the sale, the imposition of an AOC greatly reduced the extent of the market, if it did not eliminate it entirely.  We do not obtain any assistance from either transaction.  The third AOC comparable, Burnums Farm, Watford, Northamptonshire, is not helpful either, in view of the need to make substantial adjustments to reflect blight caused by the close proximity of the M1 motorway, the A5 trunk road, the main Rugby to London railway line and electricity pylons.
74.	We were able to make limited external inspections of the two farmhouses to which Mr Swallow referred, in respect of which the agricultural values had been agreed for inheritance tax purposes.  The farmhouse at Manor Farm, Naseby is a detached stone residence under a pitched slate roof, erected in about 1800, with a floor area of approximately 300 m2.  It contains seven bedrooms (one en suite), bathroom, dressing room, sitting room, kitchen and WC and the holding extends to 217.9 acres of agricultural land.  Hall Farm, Glendon is built of stone under a pitched tile roof and has an area of approximately 120 m2.  It comprises a sitting room, utility room, three bedrooms and a bathroom and has a total site area of 128.88 acres.  In the course of cross-examination Mr Swallow agreed that the three bedroom farmhouse at Hall Farm was very different from Cookhill Priority.  He said that he had produced it, not for comparable purposes, but merely to show that different values had been agreed for the market value and agricultural value of a farmhouse.  
75.	The farmhouse at Manor Farm, on the other hand, is much more comparable in size to Cookhill Priory.  We bear in mind the shortcomings of settlement evidence, but in the absence of any open market evidence we consider that the agreed 33.4% deduction at Manor Farm is persuasive and does not suggest that Mr Swallow’s 30% deduction at Cookhill Priory is too low.  The area of the agricultural land at Manor Farm was 75% greater than at Cookhill Priory.  This, together with the fact that there was no suggestion that values in Naseby were influenced by nearby conurbations any more than those in Cookhill, or that Manor Farm was significantly more attractive or had a more attractive setting, would point towards a greater discount being appropriate for Cookhill Priory.  We therefore accept Mr Swallow’s valuation and determine that the agricultural value of the farmhouse at Cookhill Priory was £425,932.50.  
76.	Finally, we consider the agricultural value of the farmhouse on the assumption that our interpretation of the legal position is incorrect and that the demand from the lifestyle farmer may be taken into account in calculating its agricultural value.  We are not satisfied that lifestyle farmers in general share Mr Beer’s view of the taxation advantages attaching to agricultural property or that they are influenced by such considerations to the extent that he suggests.  The evidence of offers in the present case does not bear out his contentions.  Cookhill Priory was purchased by Mr and Mrs Connell, and it was agreed that the house is not a farmhouse of a character appropriate to Lot 1, which was all that was included in the sale.  The underbidder, Ms Bayliss, was also only interested in Lot 1 and so would not have obtained the tax benefits.  Mr Hawkesford offered to purchase the entire estate, but his offer was not accepted, and, in answer to a question from the Tribunal, he made it clear that fiscal considerations had played no part in his interest in the estate.  We also reject Mr Beer’s suggestion that a section 115(3) restriction is a positive advantage to a lifestyle farmer.  Such a covenant would clearly add nothing to the privacy or enjoyment which would be available to the purchaser of the unencumbered freehold interest.
77.	We do, however, consider that the bids of lifestyle farmers will often be above those that working farmers would make.  In the present case we are satisfied that, if such potential bids were to be taken into account, the effect would be to increase the value of the house above the price which could be obtained in a market restricted to those intending to live in the house at Cookhill Priory as a farmhouse for the purpose of farming the adjoining land on a day to day basis.  However we do not think that a lifestyle purchaser of the whole of the property, subject to a section 115(3) covenant with the effect contended for by the taxpayers, would have been prepared to pay as much for the house as a component of his purchase as would someone who purchased part only of the property and was not subject to the covenant.  Using our judgment, we would have found that the agricultural value of the farmhouse on that basis was 15% below its open market value, so that the agricultural value would have been £517,203.75.  
78.	The parties are now invited to make representations as to costs.  A letter relating to that accompanies this decision, which will take effect when but not until the question of costs has been determined.
					Dated 10 October 2005

					George Bartlett QC, President

					N J Rose FRICS