Whether you have a legal, tax, insurance, management or land issue, Farmers Weekly’s Business Clinic experts can help.
Lisa Oliver, from Hazlewoods looks at the tax issues raised when a mixed family farm lets out its land on an Farm Business Tenancy.
Q We are owner-occupiers trading as a partnership with 300 acres of arable land, farm buildings and a farmhouse.
Cash is extremely tight. We are looking at scaling back our farming operations and releasing working capital but would like to retain the land.
What are the tax implications of renting out the land?
A Renting out the land on a Farm Business Tenancy (FBT) means land can be retained, and frees up time to allow family members to earn money outside the farm. However, it is important to consider the tax implications before making such a change.
The in-hand arable land that you farm currently qualifies for 100% Agricultural Property Relief (APR) from Inheritance Tax (IHT) on the agricultural value of the land. If the land has any non-agricultural value, for example development potential, then this will receive IHT relief for Business Property Relief (BPR) being at either 50% or 100%.
Land let under an FBT will not qualify for BPR and therefore any value above agricultural value will not receive any IHT relief.
The other consideration is the farmhouse. Assuming you, as landowner, continue to live in the farmhouse, then once you no longer occupy the land you will lose IHT relief on your house. However, if this is the only asset in your estate that does not qualify for relief, this may not be a problem, depending on the value of the house.
Regarding income tax, the business proportion of the house and vehicle expenses currently qualify for income tax relief against trading profits. Renting land out on an FBT is unlikely to result in a significant reduction in house and vehicle running costs, but any tax relief on these expenses will be restricted if the land is let in this way.
If in future you wish to sell the land while it is subject to an FBT, it will no longer be considered a business asset for Capital Gains Tax (CGT) and reliefs such as Rollover Relief and Entrepreneurs’ Relief are unlikely to be available.
Generally, rental income from farm land and buildings is an exempt supply for VAT purposes. Renting out all the land will lead to deregistration for VAT. It is possible to make an option to tax and charge VAT on the rental income – this may be appropriate if significant expenditure is likely on the farm buildings.
A number of farmers are also being approached to use parcels of land and farm buildings for non-agricultural purposes. It is really important to consider the tax implications before entering such agreements. APR will no longer be available on the land and buildings in question and BPR may also not be available if the farming partnership becomes a predominantly investment business due rental income levels.
Once land and buildings are rented out for non-agricultural purposes, holdover relief from CGT will no longer available, it will therefore not be possible to holdover any capital gain if the land were to be gifted between generations.
Setting up a contract farm arrangement is another idea to consider, as this potentially preserves the IHT relief on the farmhouse, and also the CGT reliefs of Rollover Relief and Entrepreneurs’ Relief.
The information provided in these articles does not constitute definitive professional advice and is provided for general information purposes only.
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