Mike Harrison of Saffery Champness, Landed Estates Group

With the price of UK farmland predicted to continue rising, according to leading land and estate agents, the benefits of investment in rural land and property are now being widely reported. Land values were up by an estimated 11 per cent in 2009 with a further rise of 9 per cent forecast for 2010 . And there are predictions from land agents that by 2015, farmland could double in value from its present average level of around £5,000 per acre.  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”.

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 now capital tax reliefs that can mitigate this and which make an investment in land seem attractive to non-farming buyers”.

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 or by a partnership with 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 and not otherwise covered by agricultural property relief.
The business structure is 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”.

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”.
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 and vice-versa
Holdover relief  - on gifts
Entrepreneurs’ relief on certain qualifying disposals
‘Entrepreneurs’ relief was introduced as a change to the CGT rules on 6th April 2008 and gives an effective tax rate of 10 per cent on certain business disposals, up to a lifetime limit of £1 million of gains per individual”.
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
“It’s important to note that HMRC considers that farming attracts investors because of the lifestyle it offers. However, it has specific legislation which disallows farm loss relief against general income if the farm has made losses in the five previous years. This is in addition to the restrictions applicable to all trades where HMRC perceives that the trade is not being conducted on a commercial basis or where there is no active involvement by the taxpayer”.

Saffery Champness considers that farmland is an attractive long-term capital tax shelter for 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.