The farmhouse and inheritance tax
The farmhouse can be taxed in one of three ways: as part of the farm with agricultural relief, not at all under the dwelling house exemption, or in full. Which applies depends on how it passes to you, how big it is for the farm, and where you live.
In short
- A farmhouse that passes with the land, and suits the size of the farm, counts as farm property and is taxed on 10% of its value.
- The dwelling house exemption can make a house fully exempt, but its conditions are strict.
- To get the exemption on an inheritance, you must have lived in the house for the 3 years before, own no other house, and keep living there for 6 years.
- It almost never applies to a gift.
The farmhouse as part of the farm
Agricultural relief covers farm buildings and a farmhouse where they're of a character appropriate to the land that goes with them. In practice, a farmhouse that passes to you together with the farm, and is the kind of house you'd expect on a farm that size, is taxed on 10% of its value like the land.
A large house on a small holding may not fully qualify. Whatever doesn't qualify is taxed in full, and counts against you in the 80% farmer test.
The dwelling house exemption
This exemption takes a house out of inheritance tax altogether. For an inheritance, all of these must apply:
- the house was the only or main home of the person who died
- you lived in it as your only or main home for the 3 years before the inheritance
- on the date of the inheritance, you don't own, or have a share in, any other house
- it stays your only or main home for 6 years after the inheritance
The 6-year rule doesn't apply if you're 65 or over, or if you have to live elsewhere because of your job or because of illness certified by a doctor.
Gifts of the farmhouse
For a gift, the exemption is limited to a dependent relative who is 65 or over, or permanently unable to support themselves because of illness or disability, and who has lived in the house for the previous 3 years. A son or daughter taking over the farmhouse as a gift during their parents' lifetime almost never qualifies.
Which applies to you
| Your situation | How the farmhouse is likely to be taxed |
|---|---|
| You inherit the farm and farmhouse together, and pass the agricultural relief tests | As farm property, on 10% of its value |
| You've lived there with the owner for 3 years, own no other house, and will stay 6 years | The dwelling house exemption may make it fully exempt |
| The house passes without the land, or is out of scale with the farm | In full, unless the dwelling house exemption applies |
A house can only be relieved once. If both options are open to you, your adviser can work out which leaves you better off.
Common questions
Does the farmhouse get agricultural relief?
Yes, when it passes to you together with the farm and is of a character appropriate to the land. It is then taxed on 10% of its value.
Can I get the dwelling house exemption if I own a house elsewhere?
No. On the date of the inheritance you must not own, or have a share in, any other house.
Does the dwelling house exemption apply to a gift of the farmhouse?
Only for a dependent relative who is 65 or over, or permanently incapacitated, and who has lived in the house for the previous 3 years.
See what the reliefs would mean for your own farm. It takes about five minutes, and your answers stay on your phone.