APR restriction to minimum eight-year tenancy prompts clash

A Budget consultation on inheritance tax (IHT) calling for views on restricting agricultural property relief (APR) to tenancies of at least eight years has produced a wide range of views.

The Country Land and Business Association (CLA) and the Central Association for Agricultural Valuers (CAAV) both strongly oppose the proposal, with CAAV secretary and adviser Jeremy Moody warning that the association’s analysis suggests that it could lead to the loss of 200,000ha from the let sector in England alone.

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There would be further losses in Wales and Scotland and it would act as a deterrent to any tenancies in Northern Ireland, he says.

“We foresee it creating a polarised outcome, with, at best, only marginal and temporary gains in the area of such eight-year lettings – with those that are currently longer shortening to that – but much let land being let for shorter terms and further land ceasing to be re-let.

“This does nothing for existing tenancies, reduces opportunities for would-be tenants, while many landowners could then see fiscal advantage in taking environmental options themselves rather than letting land out.”

The CLA also opposes the measure, claiming it will hamper new entrants, those leaving the industry and people looking to gradually expand.

It also warns in its response that rents on short-term FBTs might increase in order for landlords to ensure that they have sufficient cash available to meet their inheritance tax liability.

“The premise of the proposals seems to be that if you move APR so that it can only be applied to tenancies of more than eight years, the market will move to eight-year tenancy periods. That is unlikely to be the case,” maintains the CLA.

“There is a very real risk that rather than encouraging longer-term letting, the proposals to limit APR to tenancies of eight years or more will drive those who would otherwise let for the short-term market to look for other business models. This will permanently remove this land from the tenanted market.”

Contract-farming agreements

The Tenant Farmers’ Association (TFA) wholeheartedly agrees with the proposal as longer-term tenancies provided the best basis for funding investment, delivering productivity gains and securing environmental objectives.

The association’s preference is for land to be let for an initial term of 10 years, without fixed break clauses, before being eligible for 100% APR.

However, it would be happy to accept an eight-year provision – as recommended as part of the Rock Review – as a major step in the right direction.

It also rejects the argument that restricting APR in this way would be a restriction on freedom of contract.

“Landlords will continue to be free to let land on whatever terms they desire. However, they will only obtain the taxation relief if they let for longer terms,” it says.

The TFA accepts that some landlords might be persuaded not to let land because of the changed tax position, but it believes there would be a marginal negative impact.

TFA chief executive George Dunn says there is a lot of talk in the landlord community about putting land out to contract farming, rather than letting it, if the proposal is realised in a change of policy.

If that was the case it is essential that contract-farming agreements are run properly, with the landowner assuming the risks of farming the land, rather than the contractor, he warns.

“Alongside making the change to inheritance tax relief, it will be important for the Treasury to ensure that the HMRC guidance to root out bad practice in contract farming and other arrangements is also beefed up.”

Longer-term farm business tenancies

The NFU is supportive of seeking ways to increase the average length of farm business tenancies (FBTs), but is worried about the possible risks of the proposal.

“The NFU believes it is essential for Defra to undertake a modelling exercise to evaluate the likely outcome of this proposal. Given that two-thirds of all active farmers rent some or all of their farmland, the NFU could only support the proposal if the modelling strongly suggested it was likely to lead to longer-term FBTs without a significant contraction of the agricultural land available for active farmers to rent in.”