Give tax relief only on longer farm business tenancies – TFA

The Tenant Farmers Association is running a campaign throughout 2015 for longer Farm Business Tenancies. Farmers Weekly will air a range of views as the debate gathers pace, beginning with TFA chief executive George Dunn. 

The introduction of Farm Business Tenancies (FBTs) marked the most comprehensive deregulation of the agricultural let sector ever.

They came in under the Agricultural Tenancies Act 1995, in an era that saw the deregulation of everything from the London Stock Exchange to local bus services.

See also: Tenant farmers call for major tax change to increase FBT terms

The free-market ethos that dominated political thinking at the time considered that the almost complete freedom of contract offered by the new legislation was the best way to ensure the most efficient outcomes for UK agriculture.

Specifically, there were three main objectives for the new legislation: to encourage more letting of agricultural land; to increase opportunities for new entrants; and to promote economic efficiency in agricultural land use.

In the early years of the new legislation, the pattern of decline in the area of let land that we had seen prior to the new legislation was replaced with net gains up to 2003. However, the past decade has seen new lettings almost static.

New entrants still struggle

Much of the early success in expanding new lettings can be put down to the formalisation of agreements struck between parties prior to 1995, which had been attempting to avoid security of tenure.

Now, only about 9% of all lettings and slightly more than 30% of lettings where there is a change in occupier are going to new entrants, says the Central Association of Agricultural Valuers (CAAV) in its annual survey on agricultural land occupation. It is difficult to judge whether or not these figures can be viewed as a success, but there is evidence of considerable unfulfilled demand for opportunities from new entrants.

The Act had not been as successful as many would have hoped, according to an economic evaluation in 2002 by the University of Plymouth. This said new entrants reported feeling excluded because of their inability to compete with established businesses. Solutions proposed by the researchers included alternative fiscal and financial interventions.

 Efficiency needs time

As far as the third objective is concerned – that of promoting efficient agriculture – the TFA argues that FBTs have been a complete failure. Farming is a long-term endeavour requiring significant capital investment, patience, good soil management and the ability to balance profitable years against the bad. None of this is assisted by the shockingly short lengths of term offered on today’s FBTs.

Over the 20 years of the legislation, the length of term on an FBT has, give or take a few months either way, averaged four years. In fact, the CAAV reports that the 2013 average hit a new low of just over three years.

Landlords are reluctant to use anything like the full extent of the flexibility of the law, but have gained considerably from the new legislation and its associated tax changes.

With much higher demand than supply, landlords can offer short terms, for high rents at very little risk and obtain 100% Agricultural Property Relief from Inheritance Tax (IHT). By contrast, the short-term nature of tenancies is holding back progression, investment and sustainable land use.

Campaign for longer terms

FBTs have been too short for too long, which is why the TFA has launched its “FBT10+” campaign, arguing that average lengths of term should be 10 years or longer. Speaking at the Oxford Farming Conference, Scottish agricultural secretary Richard Lochhead urged the UK government to use its “fiscal levers” to encourage longer tenancies.

The TFA agrees – only those landowners prepared to let for at least 10 years should benefit from the generous IHT relief. At the same time, the government should clamp down more heavily on those landowners using share farming, contract farming, share partnerships and grazing licences as thin veneers of trading activity to gain tax advantage when in practice they take no risk, have no entrepreneurial input and lack any management control.

However, understanding how sensitive landlords are to their taxation position, the TFA is prepared to argue that those letting for longer than 10 years should be able to declare their income as if it were trading income for taxation purposes.

The TFA is also aware that some landlords, particularly institutions, are nervous about letting for long periods of time, given the difficulties that occur when attempting to bring a tenancy to an end when the tenant is in breach, particularly for non-payment of rent. The TFA would be prepared to see easier- to-use provisions for handling breaches inserted into the legislation in circumstances where landlords let for 10 years or more.

Finally, government could be doing more to require both local authority landlords and those institutions over which it has influence, such as the Crown Estate, to let on a long-term basis.