Advice on tax and legal issues when a farm tenancy ends
© Adobe Stock A careful approach is needed where a landlord wants to regain vacant possession of farmland or a tenant wants to surrender the tenancy so that, ideally, the legal and tax outcomes suit both parties.
The landlord will want to be confident that vacant possession can be obtained smoothly and the tenant will want financial recognition that they are giving up something of value.
Inheritance tax (IHT) planning, the reorganisation of assets, diversification of risk and the increasing drive for a more commercial approach is dismantling the traditional approach of some landlords.
See also: Tenants’ rights if asked to quit land planned for development
This is according to Robyn Peat, chairman of land agent George F White, based in the North East.
On the other hand, surrenders prompted by tenants are sometimes the result of the poor economic conditions in farming, poor health or other personal circumstances.
“The key thing is to get advice,” says Robyn.
“The tax situation varies in each case, it needs a lot of thought and there are opportunities to mitigate the tax.
“There can also be opportunities to offset landlord’s and tenant’s liabilities regarding dilapidations and improvements.”
Whether for an Agricultural Holdings Act (AHA) tenancy or a farm business tenancy (FBT), surrender can only occur with the agreement of both parties.
Pressure for solar, housing or other development is behind many of the notices to quit being served on tenants.
And at the Tenant Farmers Association (TFA), adviser Adriana Vaux-Chan says that the past 18 months has seen more surrender work than ever, driven mainly by development.
End of tenancy – key tax points
- Seek advice before agreeing anything
- Negotiating too early can jeopardise the tax-free status of compensation payments
- Principal private residence relief from captital gains tax (CGT) may be available on the value of the compensation related to the farmhouse
- Rollover relief from CGT may be available on payments at the end of a tenancy
- Business asset disposal relief can reduce the CGT bill if the tenant is ceasing trade
- Stamp duty land tax may be due at the end of a tenancy
Planning permission
Where planning permission is granted for a use other than agriculture, landlords can serve a Case B notice to quit.
However, these can be complicated, so a negotiated, mutually agreed surrender is often the route taken.
For example, the planning process often involves invasive surveys.
Unless these are expressly permitted by the tenancy agreement, then the landlord will need to get the tenant’s permission for these, putting the tenant in a strong negotiating position.
Similarly, where planning permission is secured over part of an AHA tenanted holding, unless the tenancy agreement allows for a notice to quit to be served over part of the holding then a Case B notice to quit will be invalid, with limited exceptions.
Julie Robinson is a partner in law firm Roythornes and advises against simply walking away from a tenancy because the tenant’s liabilities, such as rent and other obligations, persist until the landlord accepts the surrender.
As a result, anyone thinking of giving up a farm tenancy should approach their landlord and go through the proper process, she advises.
This will involve a surrender agreement, in which the negotiated terms are set out, and a deed of surrender, which formalises the legal aspect.
It would be unusual for a landlord not to be interested if an AHA tenant approaches them with thoughts of surrender, says Julie.
“We have got surrenders in the context of land being taken for development all the time,” she says.
In the vast majority of Case B cases, tenants receive the compensation representing the value of six years’ rent on the land in question.
“The fact there is a line of funding there [for the development] means there may well be room to negotiate a higher sum,” says Julie.
“It can be quite risky for the landlord to rely on Case B though. One route is to use an option to surrender, with the tenant receiving a payment on surrender and continuing to farm in the meantime.
“Then they will be given a period of notice once things become more certain in terms of the alternative use.”
Complex tax considerations
It is important to get tax advice before agreeing or signing anything relating to end of tenancy issues, which is an extremely complex area, says Keith Johnston, senior tax manager with accountant Armstrong Watson.
In cases where planning permission is achieved for a non-agricultural use, the compensation equivalent to up to five years’ rent on the land in question is tax free.
Compensation for tenant’s improvements is also not subject to tax.
However, some other payments – for example, those negotiated to encourage a tenant to leave and/or to recognise the value of what they are giving up – are subject to capital gains tax (CGT).
Timing of negotiations
Care must be taken that no formal negotiation is entered into before any notice to quit is served, as this can jeopardise the tax-free status of payments, warns Keith.
Payments for the value of growing crops, or stocks such as silage, are subject to income tax.
Where the tenant has lived in the farmhouse, it is likely that they will be able to claim this as their principal private residence, which attracts relief from CGT on the proportion of the compensation relating to the farmhouse.
In some circumstances, tenants may be given assets such as a house or land to recognise the value of what they are giving up by surrendering a tenancy, says Keith.
Such arrangements would also be assessed for CGT.
Business asset disposal relief (BADR) may be available where the tenant is ceasing business on the surrender.
This reduces the rate of CGT to 14% compared with an 18% rate for basic rate taxpayers on gains from most chargeable assets and 24% for higher or additional rate taxpayers.
The CGT rate on BADR claims rises to 18% from April 2026.
Stamp duty land tax on tenancies
Stamp duty land tax (SDLT) was introduced in 2003 and is due for payment by the tenant on any lease – Agricultural Holdings Act (AHA) or farm business tenancy (FBT) – where the total rent over the term of the tenancy is more than £150,000.
This is calculated on the net present value of the rent payable, which is the value of rent payable over the term of the lease discounted to present-day prices.
If by this calculation the rent payments amount to more than £150,000, then the SDLT payable is 1% of the excess.
The calculation should be made at the start of a tenancy and a return submitted.
However, there is widespread non-compliance with this requirement, says Keith Johnston of accountant Armstrong Watson.
He also gives the example of an initial tenancy of, say, 10 years being extended for a further 10 years.
“When a tenancy is extended in this way, a new calculation should be undertaken as if it was a single 20-year tenancy.”
In Scotland, the land and buildings transaction tax is applied in a similar way to SDLT, and a land transaction tax in Wales.
End of tenancy SDLT liability
The Tenant Farmers Association also warned recently that many AHA tenants are finding that SDLT is due at the end of any tenancies that started since 2003.
“When an AHA tenancy comes to an end, the tax is not based on a single year’s rent, but rather the cumulative rental value over the entire duration of the tenancy,” it pointed out in its weekly newsletter.
“The liability for paying this tax falls on the retiring tenant or, in the event of death, the executors of the deceased tenant’s estate.
Two-week payment deadline
“Importantly, the SDLT payment must be made within two weeks of the tenancy ending.
“Failure to meet this deadline can result in penalties and interest being charged by HMRC.”
Surrender and re-grant
The surrender of an Agricultural Holdings Act (AHA) tenancy and a re-grant may arise for several reasons, but one of the most common has been for inheritance tax (IHT) purposes.
Tenancies granted after 1995 attract 100% IHT relief, in contrast with pre-1995 agreements, where the rate is only 50%.
“I can see a point in the future when that won’t be so much of a driver, depending on the value of the estate,” says Julie Robinson of Roythornes.
Every case has to be assessed on its circumstances, but it can sometimes make sense to surrender an AHA for a farm business tenancy (FBT) re-grant, she says.
“For example, if you’re 45 and not certain a formal succession claim would succeed, you may be able to secure a fixed-term 20- or 25-year FBT, allowing you to farm until your retirement on very similar terms.”
Any new agreement must be very carefully scrutinised.
“Don’t fall for the old agreement simply being taken away to “modernise” it, she warns, as “modernising” has covered some significant changes, such as reserving the natural capital opportunities to the landlord and the ability to take back possession for non-agricultural use more easily.
Tenants may want to hold out for a rent level similar to AHA rates and for a rent review mechanism that follows a similar process, advises Julie.
“You also have to think about what might happen, such as the death of the tenant in that term.
“The tenancy does not naturally end on their death, so their estate would still be liable for the rent and any other obligations.
“A clause allowing the personal representatives of the tenant to break the agreement can cater for this.”
Similarly, frailty and illness should be covered in the agreement, possibly allowing the tenancy to be assigned to someone in the family, with the landlord’s consent for this not to be unreasonably withheld.
“You also need to make sure that any tenant’s improvements are still live and carried over into the new agreement,” Julie says.