Grazing licences are often used for short term occupational agreements. The content and operation of those licences must be carefully considered to make sure they are tax efficient
For farmers with surplus grass, grazing licences make a lot of sense. They are simple agreements; often the grazier will be a neighbour and they are a tried and tested model. But every year we see cases where tax has not been considered and a significant CGT or IHT bill results.
The issue is whether granting a grazing licence means the grazier is in occupation of the land for agricultural purposes – or whether the occupier remains the landowner. If it is the grazier, then the landowner is likely to find that CGT reliefs (such as Entrepreneurs' Relief and Rollover) are no longer available on the sale of the grazed land.
Equally problematic, is that the land will no longer "count" in determining whether the farmhouse qualifies for Agricultural Property Relief for IHT. Indeed it is often the case that that where all the land on a farm is occupied under a grazing licence – and the landowner carries out few if any husbandry operations on the grassland – then the farmhouse will not secure APR.
The alternative is for the landowner to maintain enough farming activity on the grassland to ensure that he is still treated as occupying the land for tax purposes.
How might this be done? The answer is "not very easily" but the following will help:
- Make sure the landowner is actively producing the grass crop – so that he is responsible for fertilising, rolling, weed control etc.
- Retain evidence of all of these operations. Keep receipts and a diary for example.
- Ensure the grazier isn’t carrying out the field operations.
- But if it is the grazier, who for practical reasons carries out grass husbandry operations, then make sure the landowner pays him the commercial contracting rate for those jobs. Also make sure that it is the landlord who decides when to carry out particular operations.
- Ideally, the landlord should retain some livestock of his own on the farm. In some cases it may not be possible but it would be helpful.
- Ensure that the grazing licence is seasonal, with the grazier removing his stock outside the season. A 364 day grazing licence will in reality often run from year to year with no interruption.
- Make the landowner responsible for some of the day to day animal husbandry as well – checking the grazier's stock daily, putting out supplementary feed, checking water troughs etc.
- Make sure the grazing licence records in writing the extra stock and grass husbandry activities/responsibilities of the landowner (as well as recording what activities are carried out day to day).
- If none or few of these measures are possible for the landowner (perhaps due to age, infirmity or disinclination) then assess the potential tax cost of using a grazing licence and enter into the agreement with open eyes.