Tax change for tenancies

The new government should waste no time in reviewing the tax treatment of Farm Business Tenancies to help correct the market failures within the let sector, says George Dunn, chief executive of the Tenant Farmers Association.

“After 15 years of FBTs it is clear that the 1995 Agricultural Tenancies Act has not provided a better framework for the landlord/tenant system than the 1986 Act tenancies it replaced,” he says.

“More land is being let but typically for short durations on restrictive terms. There appears to be a lack of long-term thinking among virtually all landlords.”

Mr Dunn says a system is needed that allows tenants the security to invest and develop their businesses while giving a fair return to landlords. The current system looks after the landlord but falls well short of providing the stability and security that farm tenants need to develop sustainable, long-term businesses, he maintains.

For many landlords the taxation framework within which they operate is a big driver in deciding how they will manage their land, says Mr Dunn.

“A big advantage is the 100% relief from Inheritance Tax for the agricultural value of their holdings let after 1 September 1995. The TFA is beginning to question that this relief should be so widely available.

“What is in the national interest from providing a landlord with such an advantage when his response is to let for only a short period of time on restrictive terms?”

He believes it could be time to consider a radical reform of the Inheritance Tax framework, removing Agricultural Property Relief except to landlords who let their holdings for long terms.

“At the same time government should take a stronger line to restrict land owners from claiming Business Property Relief when using arrangements which, on paper, are termed contract farming arrangements, share farming agreements, partnerships and grazing and cropping licences but are in effect tenancies, given the negligible risk to the landowner and his lack of active management of the holdings.”

A major disincentive for landlords looking to let land is the income tax treatment of the rent. It is unfair for a landlord who has long-term lets to have to treat income as investment income rather than earned income from which he can off-set other costs from his wider business interests, says Mr Dunn.

Talking business – Bidwells

Solar PV and small to medium wind energy

Farmers with big sheds could earn valuable income from solar power, an unusual income stream that Bidwells agribusiness will be exploring at Cereals.

“As well as our usual offer of farming, food, bioenergy and agri-investment, we will be focusing on the potential for clients to install solar photovoltaic (PV) systems and small to medium wind energy,” says Richard Warburton, head of agribusiness at Bidwells.

On 1 April government proposals for the long-awaited Feed-In Tariff or “Clean Energy Cashback” scheme were implemented. This scheme is designed to provide an incentive for small- to medium-scale renewable electricity generation, and is available for households, businesses, charities and public sector organisations.

“The scheme works by providing a guaranteed payment for each unit of eligible renewable electricity generated,” Mr Warburton explains. “Payment is available irrespective of whether the electricity is exported to the grid or used on site. Further income is also generated by the value of the electricity itself.”

The big winners of the newly announced tariffs are wind energy and solar PV. These technologies now benefit from very generous tariff rates, in some cases increasing the return on investment by more than five times, often giving a payback of less than 10 years.

“We expect a surge of interest in small to medium scale wind energy, where planning is less likely to be a constraint, and in both building integrated and stand alone solar panels,” he says. “The large buildings associated with farms and estates, including grain stores, barns and cold stores, provide a perfect opportunity for major solar installations.”

Those with substantial roof space are likely to find the investment opportunity very attractive, Mr Warburton reckons. A commercial enterprise installing a 200kW solar panel system costing about £500,000 producing approximately 195,000 kWh of electricity a year could generate revenues of over £72,000 from displaced electricity and the Feed-In Tariff. “This represents a payback of seven years, and the revenues are tax free for individuals.”

The Feed-In Tariff rate is fixed for 25 years for PV installations and will rise with inflation, so income is likely to rise over the lifetime of the installation, about 20 years. Savings from displaced electricity are also likely to increase in line with increased electricity prices, he adds. “This a low risk investment offering a 12-15% rate of return.”

Farm business structures for the future

Farming businesses should make it a priority to review their trading structures to ensure tax planning is as effective as possible, says Gary Markham, director of agriculture at Grant Thornton.

“We currently have a wide range of tax rates extending from 21% up to 61%, including National Insurance for trading profits. And, in contrast, we have retained the 18% on capital gains.

“Although some of this may change in a forthcoming post election budget, the number of rates is unlikely to change much,” says Mr Markham.

Most farming businesses trade as partnerships of family members where the effective top tax rate of 61% between profits of £100,000 and £112,950 compares with 21% in a limited company.

“Initially it may be beneficial to review the members of a partnership and their respective profit shares. Although it is nearly always beneficial to have a partnership as the hub of the business, many are now including a limited company, for example as a contracting company or simply as a partner in the partnership,” he explains.

“In addition, Self Invested or Self Administered pension schemes are playing an increasing role by enabling tax relief and holding farming assets such as land, grain stores or even tonnages in a co-operative grain store, although recent rules have curtailed their use for higher earners.”

There is also a plethora of joint venture structures such as contract farming agreements and share farming arrangements linked to machinery syndicates where the arable gross margin is shared equally between the members.

From an inheritance tax and capital gains tax perspective it is important to review any family tenancies that may be reducing the inheritance tax relief from 100% to 50% and possibly precluding it completely.

“In some cases a discretionary trust can be useful to hold assets between generations until it is appropriate to pass them on.”

Introducing members of the next generation into the family partnership while protecting any loss of assets in a potential divorce is difficult, says Mr Markham.

“This can be achieved by a correctly structured partnership agreement. But always beware that a signed set of annual accounts can change the original partnership agreement and possibly pass beneficial ownership of assets to unintended partners.”

Successful farming businesses will comprise a mixture of entities, he concludes. “All these are interlinked to enable succession and effective tax planning to retain as much cash as possible to reinvest and grow the family business for future generations.”

Plenty of farmers are still not taking full advantage of the advantageous treatment available for Inheritance tax, says Graham Smith, partner at law firm Roythornes.

“If everything is properly structured, then there should be no Inheritance Tax to pay on the business and agricultural assets,” he explains.

“The target we seek is either Agricultural Property Relief or Business Property Relief at 100% – meaning the value of the assets can be ignored completely for Inheritance Tax purposes.”

There are several common areas of difficulty, says Mr Smith.

“Generally speaking, where land was let on a tenancy created before 1995, relief will only be available at 50%, rather than 100%. There are, however, some exceptions.”

One is where the land was owned by the same owner in 1981, and the Working Farmer Relief rules in force at that time apply. “This is the case in surprisingly many instances.”

Another is if the land is effectively valued by reference to vacant possession – for example, where the tenant is a company controlled by the landowner, 100% relief will still be available.

“If there is a problem in that relief at only 50% is available, it would be worth considering replacing the tenancy with a new one that ensures 100% relief.

“That new tenancy does not have to be a Farm Business Tenancy – it can still attract security of tenure under the Agricultural Holdings Act 1986 in the same way as the previous tenancy is likely to have done,” says Mr Smith.

Those buying land should remember that relief is only available after two years’ occupation or seven years’ ownership. “It may be better to farm it in hand rather than to let it, certainly until seven years has elapsed.”

Issues regarding farmhouses are well rehearsed, says Mr Smith. “First it is necessary to establish that the house is indeed a farmhouse and not, as the revenue puts it, a gentleman’s residence.

“Second, even if it is a farmhouse, consider whether any part of the value is non-agricultural and, therefore, not relievable,” he adds.

Most farms will have let off cottages, buildings or paddocks. None of these assets will attract Agricultural Relief if they are not used for agriculture.

“If this is an issue, then consideration needs to be given to securing Business Property Relief instead of Agricultural Property Relief.

“Most of these issues are solvable. They just need informed consideration,” says Mr Smith.