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With the price of UK farmland continuing to rise, in some cases to £10,000 per acre, the benefits of investment in rural land and property are now being widely reported. According to leading land agents, the proportion of investment motivated purchasers more than doubled to 31 per cent last year; and after a rise of over 9 per cent in 2010, land values in the UK are expected to move be upwards to over 10 per cent growth in 2011, with further rises predicted for 2012.
Mike Harrison of Saffery Champness Landed Estates and Rural Business Group answers some of the queries that are often raised about UK farmland investment:-
How is farmland defined for tax purposes?
"HMRC recognise farmland as being land occupied wholly or mainly for the purposes of food production either via the growing of crops for direct or indirect consumption or for the rearing of livestock, or both. For Inheritance Tax purposes, it is worth remembering that farmland is extended to include woodlands (on the farm) and any buildings used in connection with the farming business, the occupation of which is of a ’character appropriate to the farmland’. This can include farmhouses, cottages and farm buildings".
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Is farmland a suitable investment?
"While the demand for farmland is influenced by a lack of supply and substantially driven by existing farmers, there are several good reasons why an investment in farmland may be appropriate from a tax planning perspective for traditional farming families and for so-called ’lifestyle’ farmers alike.
Indeed it is non-farming buyers that in recent years have competed with farmers in purchasing farmland thus pushing prices upwards.
"Both landownership and farming of land are inherently long-term business activities that have passed down from generation to generation. While, historically, capital taxation has been adverse to landowners there are currently generous capital tax reliefs that can mitigate this and which make an investment in land seem attractive to non-farming buyers".
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What inheritance tax reliefs (IHT) are available?
"The two principal reliefs from IHT are Agricultural Property Relief (APR) and Business Property Relief (BPR). Both of these reliefs are subject to certain ownership conditions, and operate by reducing the value of qualifying assets that are liable to IHT". The reductions for let land are as follows:
• 100 per cent for property, farmed under a tenancy which commenced after 31 August 1995.
• 50 per cent for most other tenanted agricultural land
For let farmland the reliefs available at the applicable relief rates are only given on the agricultural value of the property concerned, which may be lower than its market value; for example where there is a possibility of future development or amenity value attached.
Where the property is used in-hand the relief will be available, at the rates detailed below, on the market value rather than just the agricultural value.
• 100 per cent for interests in business assets owned by a sole trader, a partnership or shares in private companies carrying on a farming business
• 50 per cent for land, buildings and certain other assets used in a farming partnership or company, but owned personally.
The business structure is therefore of great importance if the maximum relief is to be available as property held outside the business structure is only eligible for the reduced relief.
"The availability of APR on the farmhouse is unique, reflecting the close involvement of the farmer with the business. However, this means that the appropriateness of the farmhouse is closely scrutinised by HMRC".
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What are the ownership conditions?
"To qualify for APR, the farmland must either have been owned by the farmer for seven years and used by someone else, e.g.an agricultural tenant, for the purposes of farming, or have been farmed in hand by the farmer for two years,
"The ownership of land has often been linked with tenancies, as this allows the landowner to divest himself of the management of the farm.
However, capital tax disincentives have encouraged new vehicles for carrying on farming on the farmland, such as contract farming and share farming. These agreements need to be carefully structured so as to allow the landowner to be treated as a farmer by HMRC".
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What capital gains tax (CGT) reliefs are available?
"If the farming is in hand, whether contracted or not, then there are three valuable CGT reliefs are available when the property is sold or transferred:
Rollover relief - on the replacement of land and farm buildings with other qualifying business assets following the sale of the original property
Holdover relief - on gifts
Entrepreneurs’ relief on certain qualifying disposals
’Entrepreneurs’ relief was extended in the March 2011 Budget and now provides a lifetime limit of up to £10 million of gains per individual and gives an effective tax rate of 10 per cent on certain business disposals.
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What about the Capital Gains Tax (CGT) treatment of entitlements?
"Farmers purchasing land following the introduction of the single farm payment (SFP) regime on 1 January 2005 should be aware that part of the cost could relate to the purchase of SFP entitlement, which is separate from the land. The disposal of SFP entitlement is treated as a separate asset for capital gains purposes".
Are there special income tax rules?
"Yes, there are income tax rules for farmers that reflect the special nature of farming and rural business. These are:
• Rules to treat all farming as one trade, even if the farms are in different areas
• The ability to average a farm’s financial results between tax years, if this reduces the tax liability
• An election to treat a herd of breeding animals as a capital asset rather than trading stock
• Some relief for losses against other income
The loss regime is now more stringent, particularly for those who have other sources of income and are not involved on a full-time basis (i.e. less than 10-hours a week). . Losses for those individuals will only be available against future profits unless the losses are either below £25,000 or the individual is a full time farmer. In any event the losses will always be restricted to being carried forward against future profits where the business has made losses for the last six years.
Saffery Champness considers that farmland is an attractive long-term capital tax shelter for many individuals especially those wishing to mitigate their exposure to Inheritance Tax provided the property is held in an appropriate style and operated in a manner that will enable relief to be claimed on its market value.
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Source: Farming UK