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Potential reforms of Agricultural Tenancies and IHT Agricultural Property Relief

In April 2018 the Government’s Office for Tax Simplification (OTS) began its review of Inheritance Tax, including reliefs relating to agricultural and business assets. The OTS’s second report, which was due to be published in Spring 2019 and is overdue, is expected to deal with more technical aspects of IHT such as Agricultural Property Relief (APR) and Business Property Relief (BPR).

In May 2019 the Department for Environment, Food & Rural Affairs (DEFRA) published its consultation on proposed reform of Agricultural Tenancies.

The outcome of both Government reviews will be relevant to landowners who are considering their succession planning and business structuring.

The IHT Reliefs:

In simple terms APR is primarily available on land and buildings which have been occupied for the purposes of agriculture:

  • For two years in the case of land which is owner occupied
  • For seven years on land which is let.

Relief is restricted to the agricultural value of the land (i.e. the valuation assumes that there is an agricultural tie) and farmhouses must satisfy the character appropriate test. Relief is at the rate of 100% for land and buildings which are owner occupied or let on either a Farm Business Tenancy or a post 1 September 1995 AHA succession tenancy; and at the rate of 50% for land let on AHA tenancies where there’s been no succession. BPR is available at 100% on interests in a trading business and at 50% on assets owned personally but used in a person’s business.

There’s a requirement that the business is carried on for profit and that it consists wholly or mainly of trading activity. Businesses in which the activity is wholly or mainly the holding of investments are excluded entirely from relief. The value of a trading business which otherwise qualifies for BPR will have the value of relief reduced by “excepted assets” such as cash or other assets which aren’t required for the future use of the business.

Among the policy justifications for APR and BPR there has been a recognition of the need to enable trading businesses and farms (whether they are let or not) to continue to operate irrespective of an owner’s death – the principle being that businesses and farms which pay other taxes shouldn’t have to divert crucial resources away from their main purposes by having to fund a substantial IHT charge, the timing of which can be unpredictable.

OTS Review:

The OTS Call For Evidence asked specifically if:

  • Any complexities arise from the fact that BPR and APR overlap, at least in part?
  • Are there discrepancies in the way that they operate?
  • Would it help if APR was replaced by BPR, or if the two were merged?

The last two options have raised the possibility of APR for let agricultural land being curtailed, or perhaps even withdrawn, simply because the trade is carried on by someone other than the land owner. If that was to come about, it would not be the first time that a real tax increase has been disguised in the name of “simplification” or “alignment”. The OTS is a semi-independent body within the Treasury, and it can produce well thought out reports, but politicians (of all hues) may be inclined to cherry pick elements from reports to raise more tax, which could easily be done here.

DEFRA Consultation on AHA Tenancies

The consultation proposes reforms to enable the assignability of AHA tenancies as a way of “removing barriers to productivity improvements and facilitating structural change in the tenant farming sector”.

The consultation’s introduction recognises that rental provides an opportunity for new entrants to farming and flexibility for established farmers to grow their business by expanding one of their key productive factors, land. It also provides the opportunity for farmers who may not wish to farm all or part of their land to let it to others in suitable circumstances.

DEFRA states that tenancy flexibility is a key part of the industry’s ability to respond to changing markets and this will be ever more important in the current economic and political climate, particularly as levels of financial support diminish.

The report reflects a concern that the current succession provisions of the 1986 Agricultural Holdings Act are preventing suitable farmers from taking over a holding and older AHA tenants without successors have limited options to realise value enabling them to retire.

Included among DEFRA’s proposals is a new power for existing AHA tenants to assign the tenancy to a new tenant. It’s envisaged that the power of assignment would be exercised on a single occasion only and could be subject to:

  1. A right of the landlord to pre-empt assignment by negotiating to buy out the tenant and thereby terminate the tenancy.
  2. A landlord’s right to serve an incontestable notice to quit at any time after the 25th anniversary of the assignment.
  3. The rent payable for the assigned tenancy will become open market rent to be determined on the same basis as for an FBT.
  4. No succession rights would apply to the assigned AHA tenancy
  5. A greater role for the landlord in selecting the new tenant, such as a right of refusal if the new tenant does not demonstrate suitable qualifications or farming plans and practices which are not compatible with the landlord’s estate management aims and objectives.

The reforms of agricultural tenancies proposed by DEFRA are intended to remove barriers to productivity at a time when the agricultural sector will be grappling with the impact of the phased reduction of support payments. Potential tax increases for agricultural landlords could introduce an unwelcome element of volatility into the rural land market at a time of already significant change. With so many factors at play, landlords and tenants alike may struggle to plan long term, but it’s all the more important that agricultural landowners review their succession plans to make sure that they are prepared for any coming changes.

Published: June 2019

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June 2019

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Andrew Parry