A Blog by Rob Hitch
Having followed the developing #aggen conversations on twitter recently and read some of the varied and interesting blogs and comments I am dipping my toe in the water with this my first blog.
Despite working on farms, studying agriculture, and advising farmers for the last twenty years my work now involves developing tax strategies for many businesses but primarily dairy farmers.
Having followed the initial discussions about getting young people into farming I was interested in the points raised at the NFU tenants conference and subsequently reading the Tenant Farmers Association’s 2020 report.
Tenancies are an ideal way to introduce new entrants to farming, the lower capital requirement is a big advantage over having to buy land. This is even more the case following tightening up of lending criteria following the 2008 financial crisis.
The longer the tenancy the more incentive there is for a tenant to invest in the holding, which can only be a good thing for the farming industry. Many institutional landowners already have long term tenants, this however can cause just the same ‘blocking’ as individual farmers owning land as tenancies like farms are passed from generation to generation.
I don’t think there are any ways of resolving the ‘blocking’ issue but there may be ways of encouraging more land to be made available on longer term tenancy agreements rather than the short term grazing and contract farming arrangements that have found favour.
In Cumbria grass letting is the preferred method of leasing land, normally for six/seven months from April to October. This gives capital tax advantages to the land owner as they are treated as farming. The same scenario is available for contract farming and share farming arrangements.
The TFA report suggest changes to the Inheritance Tax (IHT) regime to effectively remove Agricultural Property Relief (APR), except for let farms let for a term of at least ten years. This would leave farms not held on this basis qualifying for IHT relief under the Business Property Relief (BPR) provisions.
The immediate effect of this would be to remove IHT relief for farmhouses. If farmhouses aren’t worth much this might not be an issue. For valuable properties you may have to put a tenancy in place to ensure you qualify for APR. Will this be possible for a single person who owns land and operates as a sole trader, or will this group of farmers be disadvantaged by this proposal?
The other major issue is that property used in your business but not owned by it only attracts 50% BPR, as long as you own 5% of the business,(more than 50% if let to your own company). Therefore anyone who owns land in differing ownership to the trading structure would be forced to create a tenancy of at least ten years, to ensure the property qualified for APR.
This might encourage a number of landowners to let property on a longer tenancy rather than through alternative arrangements.
BUT!!
Is IHT the main reason people are avoiding letting land on tenancies?
If my client grass lets, they qualify for APR for IHT as they would if they let it on a tenancy. If they do the latter and remain in the house, then they will lose IHT relief on the farmhouse, not an issue if taxable estate is below £325,000/£650,000.
What my client does lose is Capital Gains Tax (CGT) relief as they are not deemed to be trading. The effect of this is they lose Entrepreneurs Relief if they subsequently sell the land, meaning the tax rate increases from 10% to probably 28%. They would also lose the ability to rollover the capital gains.
Would changes to the IHT rules which might be seen to encourage longer term lets, backfire if CGT becomes the issue?
Will lawyers, accountants, and land agents simply switch to developing convoluted business arrangements to mitigate CGT instead of IHT?
Can a complicated taxation regime such as that in the UK actually be tinkered with to encourage longer term agricultural tenancies, or is all down to landowners?
Follow Rob on Twitter @Rob__Hitch
