Keen investors will have noticed that the value of agricultural land in the UK has increased by almost 200% within the last decade, as confirmed by the most recent Knight Frank Farmland Index.
According to the Savills Farmland Value Survey for the third quarter of 2014, the average value for prime arable land strengthened by 3.2% across Great Britain to just over £9,750 per acre. This equates to a 12.8% value increase in prime arable land since the beginning of 2014 and an average 17.9% increase year on year. The highest land prices are in the East of England where the cost per acre of arable land is now well above £10,000 compared to just over £6,000 four years ago.
The large increases in the value of agricultural land have been attributed to the constrained acreage of farmland available on the market and the growing interest from non-agricultural investors in land.
A prime example of serious recent agricultural investment is that of billionaire vacuum cleaner and fan inventor Sir James Dyson’s purchase of 17,000 acres of Lincolnshire farmland for £150 million last year.
The 2008 market crash made land an attractive investment as it appeared to be a safe haven and it is still viewed as such by many investors. Crucially, the purchase of farmland also presents an attractive opportunity for those seeking the significant relief on inheritance tax which can be achieved through ownership of agricultural property.
Contracting agreements and farm business tenancies can be used to reduce management responsibilities for non-agricultural investors in land. In addition, if the specific timelines and factors outlined below are adhered to, both types of agreement may also attract 100% inheritance tax relief on the agricultural value of the land for the owner concerned.
Agricultural property relief
Inheritance tax relief is only available on the agricultural value of land and property which is occupied for the purpose of agriculture.
In order to qualify for relief the land or property must either:
- be owned for seven years and occupied by someone other than the owner for the purpose of agriculture throughout this period or,
- if occupied by the owner, must be occupied for agricultural purposes for the last two years.
If property is inherited, ownership runs from the date of death.
However, there are a number of additional factors which determine if agricultural land qualifies for either 50% or 100% relief. These will depend on a detailed assessment of the land and its use.
Exclusions and diversification
The Savills Farmland Value Survey also identifies continuing pressure on farm cash flows with the significant weakening of commodity prices, a 7% exchange rate hit on subsidies, and the prospect of interest rate rises. Such pressures are likely to lead more agricultural land owners to consider diversification in order to supplement their income.
However, farmers who want to diversify should be aware that there are a plethora of exclusions which prevent land which may appear to be ‘agricultural land’ from obtaining agricultural property relief. These include:
- the use of some farmland for the generation of renewable energy may not qualify for relief
- land used for grazing horses for recreational riding may not qualify for relief
- farm houses will also only obtain relief if they are occupied with surrounding farmland and are of a 'character appropriate' to the whole acreage involved. This definition demands careful scrutiny of the specific property concerned and any land which has been diversified
- 'hope value' where land may be used for development will not qualify.
Potential future changes
In addition to the exclusions highlighted above, recent developments have raised questions about the security of investing in agricultural land. A report from the National Audit Office (NAO) released in March 2014 suggested that it is possible that HMRC may reduce the availability of agricultural property relief in the future due to concerns that the relief is currently being abused in order to avoid inheritance tax. More recently, the NAO has suggested that HMRC needs to analyse the costs and benefits of the reliefs against clearly delineated objectives to assess their suitability.
All these factors should be carefully considered by those who are interested in investing in agricultural land. Anyone holding investments in agricultural land will benefit from reviewing their assets to confirm their inheritance tax treatment. This may be subject to change, particularly if any recent developments have been made to a farming business.
Owners of considerable agricultural assets should take legal advice to identify which of their assets may not be subject to relief as large increases in the capital value of their land and other assets may have created a substantial inheritance tax problem. With sound advice and strategic planning, any potential problems can be effectively managed.