The Farm Tenancy: Is it an expense of the business?

10th January 2020

Most farming businesses evolve over time and it is often quite common to see them incurring similar expenditure year-on-year.

There’s a natural presumption on the part of proprietors that the expenditure running through a set of business accounts is an allowable expense where incurred for the purposes of the farming business. However, in some circumstances it raises the question of what is the most appropriate treatment of that expense?

The Agricultural Holdings Act tenancy

One area where this issue can arise involves rent paid under an Agricultural Holdings Act (AHA) tenancy, or improvements carried out to the property.

Many tenancies in family farming businesses were created under these rules as it eased the Capital Transfer Tax burden, by devaluing the farm on which the tax applied. To achieve this, a farmer would take on a partner, say spouse, son or daughter, after taking the farm off the business Balance Sheet. A tenancy would be created, and the partnership will pay a rent to the land-owning partner. The farmer would be the landowner and one of the tenants with the other partner, or partners, would be the other joint tenants.

If, for example, this was a farmer bringing his son and wife into partnership with him, then when the original farmer passed away, this structure would roll on to the next generation. The farmer’s widow may now be the landowner and the grandchildren may have joined the partnership. As a result, the tenants may now only be the widow and the son.

However, joining the partnership does not enable the grandchildren to also become the tenants, unless the current tenants (with landlord consent) assign the tenancy – which will be a Capital Gains Tax event.

Partnerships agreements

In some cases, partnership agreements can stipulate that the tenancy will be held in trust for the farming partnership, so the traders can quite legitimately feel that if an expense is paid, such as the rent or putting up a building on the tenanted farm, this will be an expense of the business. Often the rent will appear as a deduction from profits in the accounts, and a tenant improvement will appear on the balance sheet and it would be a cost burden shared by all the partners.

If the tenant is one named individual, for succession purposes a landlord would only consider a suitable candidate who was a close relative of the tenant. The remaining partners in the farming business may wish to carry on farming the land on the demise of the tenant but they may not have the right to succeed.

Where does VAT come in?

When the business has continued to pay the rent on behalf of the tenant and incurred improvements, there could be some value that attaches to the other members of the partnership even though they may not be the legal tenant. Should, in fact, the rent and improvements be charged to the tenant alone and not to the partnership?

There is also the question of Value Added Tax (VAT). Where the business incurring the expenditure receives invoices made out to the business name, you would naturally wish to recover the input VAT. In circumstances where perhaps the landlord stipulates the tenancy must not become partnership property, and therefore the tenancy only rests with the tenant, then should that VAT be recovered if the expense is the responsibility of the tenant (one individual) he would not be registered for VAT in his or her own right.

Where the landlord was trading in partnership on 10 March 1981 then they may be eligible for the ‘working farmer’ relief, thus enabling his estate to be eligible for 100% Agricultural Property Relief on the value of the tenanted farm. When the property passes to the next generation (not spouse) after 10 March 1981 the relief falls to 50% for the new landlord, even if they were a partner before 1981.

The introduction of the Structures and Buildings Allowance also raises the question of who is eligible to claim this new allowance?

It’s clear that, as businesses evolve over time, what might have been the correct treatment initially may no longer be the correct treatment now. In such circumstances careful consideration of the facts is essential, and it’s important to review these aspects with your Old Mill adviser. If you need any further help or advice on the information above then please get in touch with us here.

Further reading