The rural tax shopping list

The RICS has called for the next government to issue “property tax forward guidance” within its first 100 days in office. This demand is set out in its Property in Politics report as one of 12 measures that would help to “recognise the role property, across housing, planning and development, construction and infrastructure plays in driving the UK’s economic growth and building better communities”. In calling for a property tax review the institution condemns “annual piecemeal change and reform [which] provides uncertainty to the market and so acts negatively on long-term investment”. How does this call apply to the rural property owner and investor? Current tax system It would be easy to argue that farming already enjoys extensive and substantial tax reliefs: the rating exemption of agricultural land and agricultural property relief (“APR”) from inheritance tax, to name just two.  However, this would be to ignore the particular challenges that face farming businesses and rural estates; in particular, their considerable capital value in relation to their profitability. For example, the return on capital of a mixed rural estate may be no more than two or three percent a year. At an inheritance tax rate of 40% before any reliefs, that implies 20 years’ profit to pay the inheritance tax bill on the death of an owner. Much of the return on rural land can come in the form of capital growth – taking total returns up to 12% or more. But only a fraction of this total return is in the form of a real cash return from which to pay a tax bill. With a death every 30 years or so, there would be little time to generate capital for reinvestment or other uses if inheritance tax reliefs were withdrawn altogether from farmland. It is also clear from recent research by agricultural business consultant Andersons that careful cost control is a vital part of profitable farm business management. What should the rural tax shopping list look like?  Agricultural property relief APR from inheritance tax is broken, despite its economic importance to rural estate prosperity. A succession of cases has been needed to clarify such esoteric aspects as the meaning of farmhouses, “character appropriateness” of related property and even the definition of “agricultural value” itself. In Golding v HMRC [2011] UKFTT 351 (TC), HMRC was forced to concede APR by the First-Tier Tax Tribunal on a farmhouse only to see it sold out of agricultural use by public auction within a few months. If there is any point to APR it must be aimed at the retention of assets and capital within the industry, and yet the relief itself only looks backwards to the history of an asset’s use, rather than forward to its future use. The Tenant Farmers’ Association (“TFA”) has called for reforms to the relief for let land, demanding that farm business tenancies should be for a minimum of 10 years in order to allow landowners to qualify for the full 100% relief. This highlights the broader question of succession in an industry dominated by older farmers. The interaction of capital gains tax (“CGT”) and inheritance tax means that for many older farmers it is preferable to hang on to the farm until they die than to effect a lifetime transfer of working assets to the next generation. APR means there is next to no tax liability on death, and only lifetime gifts incur CGT so death represents an excellent opportunity to avoid it. The Country Land and Business Association (“the CLA”) has responded to the TFA demand by claiming that APR “has done more to encourage the letting of agricultural land than any other fiscal policy. If tax reform is needed, the government should look at extending business property relief to cover the diversified let estate” (Andrew Shirley, CLA chief surveyor). Thus, three items on APR demand inclusion on our shopping list. First, some form of relief for agricultural property, both let and owner-occupied, in view of the low returns against capital values and to ensure capital remains deployed effectively within the industry. Secondly, the relief should be more targeted at ensuring the retention of that capital in the agricultural industry or the rural economy more generally. Therefore relief should be repayable if assets leave the industry within a set period – perhaps 10 years in the first instance. Thirdly, APR should be re-examined with regard to its interaction with CGT to encourage lifetime transfers to the next generation and in order to encourage new blood into the industry in whatever form is commercially realistic (and not just the narrow focus on 10-year farm business tenancies demanded by the TFA). Capital allowances The past few years have seen huge swings in the annual investment allowance for income tax. From an annual allowance of £25,000, this has been temporarily uprated to £500,000, reverting again to £25,000 after December 2015. The purpose of this allowance is to allow all businesses, not just agricultural ones, to accelerate the depreciation on the purchase of new plant and machinery for tax purposes. The lower sum of £25,000 does not go very far on a modern farm – nowhere near the price of a new tractor, for example – whereas £500,000 will buy one or more tractors or a combine harvester. The “normal” rate of allowance on plant and machinery is a miserly 18% write-down a year. The more generous allowance is all very well, but its availability has not coincided with a period of high farming profitability. A clearer view ahead over a five-year timescale would allow better planning of capital investment and replacement requirements, even if the total annual allowance was a little more modest than £500,000. And the rest… SDLT on annual tenancies, VAT on let land, stocktaking valuations, clearer boundary definitions and guidance on business property relief for the actively managed mixed rural estate are all areas equally demanding of close attention for the future prosperity of the rural economy. Early action on APR and the annual investment allowance should, however, be the first priorities for the first 100 days of a new government. Charles Cowap is a rural practice chartered surveyor