Tax pitfall reminder for landowners with ‘lax’ grazing lets
© Tim Scrivener Landowners and farmers risk a large inheritance tax (IHT) or capital gains tax (CGT) liability if they take a lax approach to the management of any seasonal grazing agreements.
Accountant Saffery Champness has issued a reminder to landowners that anyone who uses a grazing let agreement should ensure they continue to maintain a significant role in the management of the land, so as not to jeopardise valuable tax reliefs.
Taking an active role in managing the land and having written evidence of this will help to demonstrate to HMRC that the owner was trading, rather than passively letting the land.
See also: Tips for maintaining farming and inheritance tax reliefs
Although agricultural property relief (APR) is available to farmers who either farm the land themselves or let the land for agricultural purposes, APR only removes from IHT the agricultural value of the land.
It is often the case that land has hope or development potential that would still be exposed to IHT and this is where business property relief (BPR) can be used.
However, to qualify for BPR, the property has to be used in a business that is predominantly a trading enterprise and not mainly an investment concern, with let land being an issue as it is regarded as an investment for tax purposes.
Farming land, rather than letting it, means the owner may also qualify for certain CGT reliefs.
For example, on a sale of the land, if the farmer ceases their business they may only have to pay CGT at 10% rather than 20% if they qualify for business asset disposal relief (formerly known as entrepreneurs’ relief).
Grazing lets
Land is let for grazing, or “grass keep”, under an agreement for a period of less than 365 days – often 364 days – with no right of renewal.
The agreement is effectively a licence over the land and avoids creating a legal tenancy, which might give the grazier security of tenure.
Written evidence
Landowners who have any grazing let agreements therefore need to actively manage operations to maintain a reasonable standard of efficient production, ensure that pasture is in a good state of cultivation and fertility, that crops are free from disease, and that any necessary maintenance is undertaken.
David Chismon, partner at Saffery Champness, said: “It should be best practice for the landowner to keep a regular record of the decisions they make that affect the management of the land.”
For example, they should ensure that fertiliser is spread, weeds are tackled and ditches and hedges maintained. They should also control when the animals of the renting grazier are allowed access to the land.
“The condition of the soil is very important, and the landowner needs to be aware of it and maintain or improve it to maximise productivity – these are actions of someone trading rather than a passive investor,” he said.
“The landowner also needs to ensure they remain in occupation of the land, so it is suggested that the legal nature of the agreement should not create a landlord/tenant relationship. The landowner needs to demonstrate they have possession of the land and soil and, therefore, it may be necessary to limit the time when the grazier can put their stock on the land to graze.”
The tenants’ view
George Dunn, chief executive of the Tenant Farmers Association, said while his members were glad to have access to land through short-term agreements, they were often not in the best interests of the sector or the environment.
He said he frequently comes across instances where the owner of the land is not fulfilling the management role outlined by their accountants and other professional advisers.
“We see it all too often. Our members will ring up and we ask them who is doing the fertilising, hedging and ditching and they say: ‘We are’. We ask: ‘Do you leave the land on a day a year so you don’t create a tenancy?’ and they say: ‘No, we are here 365 days/year’.
“While it is fine as long as it lasts, members can’t invest in that land or bring it into an agri-environment scheme, as they don’t know when they are going to lose it.”
Mr Dunn said the government should look at following the example set by Ireland which offers income tax relief to landlords letting land for at least five years.
“From a public purse perspective, it would be cash neutral as people are doing [short-term lets to avoid tax] anyway. But in the end you’d get longer-terms agreements, more secure agreements, better investment and better environmental management.
“There are public benefits, as much as there are private business benefits.”