Farm business structures: Tenancy Agreements

Farming families are becoming increasingly aware of the importance of reviewing their business structures, as well as their personal affairs.

More and more are taking professional advice. Unfortunately, there are a number of circumstances where failure to review affairs has resulted in taxation which could possibly be avoided. For those left after the death of a loved one, this can cause significant difficulties emotionally and financially. One such area often overlooked is the review of any farm licence or lease.

Reviewing tenancies is fundamental. Whenever farming businesses are being reviewed, whether considering and signing off the annual accounts, succession or otherwise, such tenancies must not be forgotten. Identifying the type of tenancy and ascertaining the tenant’s occupational right is the starting point. Let property can qualify for Inheritance Tax Relief in the form of Agricultural Property Relief. However, this valuable benefit may be lost if the agricultural activity is no longer carried out. Increasingly, HM Revenue and Customs looks closely at tenancies to ensure that the land is still occupied for agricultural purposes. It often requires evidence that extends beyond any agreement.

The type of tenancy also affects the tax position. For example, an Agricultural Holdings Act Tenancy only attracts 50% Agricultural Property Relief and not 100%, as will be the case with the use of a Farm Business Tenancy or Share Farming Agreement. 

Of course, for a tenant of Agricultural Holdings Act (AHA) tenancy there are a number of benefits. These come mainly in the form of succession and protection. Surrendering an AHA Tenancy and putting a Farming Business Tenancy in place would increase a landlord’s Inheritance Tax position, but in reality this is often unacceptable to a tenant without some means of compensation giving up those substantial rights. Further, other taxes have to be considered such as Capital Gains Tax and, on occasions, Stamp Duty Land Tax.

There are, however, alternatives enabling tenancies to be changed whilst still offering the same protection under the Agricultural Holdings Act. 

In conclusion, tax implications of tenancies, regardless of whether they are Agricultural Holdings Act Tenancies or Farm Business Tenancies, must not be ignored. The ramifications for the landlord and the tenant could be significant. It is equally as important, having reviewed the tenancy arrangements, that any updated agreements do not have adverse effects on other areas of tax planning. A review, therefore, does involve the need for both legal and tax professionals working together. Hopefully a little time and money spent reviewing affairs will reap significant benefit upon the death of the landlord or tenant.