Farm Business Tenancy: The tax implications of letting your land
24th July 2017
Looking for a way to reduce involvement with the day to day farming operations, whilst retaining the farm, is dilemma that more and more farmers are faced with in recent years. The Farm Business tenancy is one solution in this circumstance but what should a discerning landowner be aware of before entering into this type of arrangement?
The Agricultural Holdings Act – How it used to be
The predecessor to the Farm Business Tenancy (FBT), the Agricultural Holdings Act 1986 tenancy, was not particularly favourable to a landowner when it came to Inheritance Tax (IHT). A landowner who let his land under an AHA tenancy could only obtain the benefit of Agricultural Property Relief (APR) from Inheritance tax at 50% on the agricultural value of land. Contrast this with a landowner letting their land under an FBT, who then gets the benefit of APR at 100% on the land’s agricultural value.
It would therefore appear to make sense for a farmer wishing to reduce their involvement in the day to day farming operations to consider the use of an FBT, however, APR on the land is only part of the story.
What is Agricultural Property Relief (APR)?
APR provides relief from IHT on the agricultural value of land, where land has a market value in excess of agricultural value, this excess value can only receive relief from IHT via Business Property relief (BPR). Land let under an FBT cannot qualify for BPR, therefore any value in excess of agricultural value will not receive relief from IHT.
In addition to the lack of availability of BPR on land, a farmer could also lose APR on the farmhouse. For APR on a farmhouse to be available it is essential the house is occupied by the individual actively farming the land and that the area of land the farmhouse supports is of sufficient size to justify the claim for APR.
If the land which the house supports is farmed under an FBT, apart from one specific circumstance, the landowner is not considered to be in occupation of the land. Receipts arising from the land (i.e. rents from the FBT) are considered to have arisen by virtue of ownership rather than occupation, therefore where the majority of the farm has been let under an FBT there will be no relief from APR on the farmhouse.
It is not just the loss of IHT relief that a landowner needs to be wary of when considering a FBT. Land let in this way is not considered a business asset for Capital Gains tax and therefore capital reliefs such as rollover relief and Entrepreneurs’ relief will not be available to a landowner who lets their land under an FBT.
What about the alternatives to a Farm Business Tenancy?
Grazing licences, contract farm arrangements and share farming are often considered an alternative to a FBT. It is possible with some of these arrangements to preserve the IHT relief that would be lost with an FBT, and maintain the eligibility of the farm for the CGT reliefs. However, this is by no means guaranteed and each agreement should be reviewed individually to ensure it fulfils all the necessary criteria.
If you would like further help on the issues above speak to one of our Farming Advisers.