So you want to… let land and property?

Deciding to stop active farming and let out land and property is a complicated task but can prove mutually beneficial for both parties.

Making the switch to becoming a landlord might be due to a number of reasons, including retirement, the absence of successors, and a desire to pursue other interests.

Alistair Cochrane, land agent and director at Strutt & Parker, who has let many farms over the past 20 years, said: “In very many instances, during difficult times, farmers have felt that their individual farms were not big enough to afford the economies of scale that are increasingly needed.

“They have decided to let their holdings to other existing operators who can achieve those economies of scale and can afford to invest in the ever-more expensive equipment.”

See also: Should you diversify? What to consider

Others have chosen to exchange the anti-social hours and risk farming presents with a steady rent and more free time.

Farmers Weekly has spoken with land agents, accountants and lawyers to find out what a first-time landlord needs to know.

Setting a tenancy term

There is wide scope for how long a tenancy term should be, and circumstances will dictate what is most suitable from a family and tax perspective.

The tenant will have more incentive to invest if they have the security of a longer term, says Mr Cochrane, who has negotiated lengths from nine months up to 80 years.

However, letting a farm for longer can diminish its capital value and restricts the owner’s flexibility.

The ideal term will accommodate the needs and objectives of both parties. It is sensible to agree a term length that is long enough to enable the tenant to enter and fulfil the terms of schemes, such as agri-environment schemes, he says.

Lydia Cox, chartered surveyor at Stags, says that an agreement that is shorter than two years has optimum flexibility. It can legally have a break clause [the option to quit before the term is up] at any point within the term and the notice period can be shorter.

Two years or longer, there is a requirement for a minimum of 12 months’ notice prior to a break clause being exercised, and it is important to meet the specified date of the agreement.

Offering a longer term may mean the tenant is more likely to invest in the farm in terms of soil quality, fertility and general husbandry.

How to choose a tenant

When letting a whole unit, the particulars should make it clear that tenancy bids should include proposals for the management of the farm, evidence of the applicant’s existing or previous farming record, and details of financial standing. Sometimes a full business plan may be required.

A shortlist of the best applicants should be interviewed by the landlord and/or their agent.

Mr Cochrane advises visiting the applicants’ existing farm and says references can be invaluable. Sometimes it may be wise to request the tenant nominate a family member or other sponsor as guarantor.

For bare land, a simpler process, often by circulating particulars to local farmers, can be adopted.

See also: So you want to … grow and sell Christmas trees?

Be wary of accepting the top rental bid in a tender situation, unless that bid is strong in all other respects, with viable management proposals, a realistic budget, backed up by a good trading record and farming experience, says Mr Cochrane.

What qualities does a good landlord need?

A landlord should be able to leave the farming of the holding to the tenant and trust in their ability to run and look after it well, says Mr Cochrane.

Obligations listed in the tenancy agreements must be undertaken fully and swiftly. Be sure to discuss and agree all the tenancy terms with the tenant before the lease is signed, particularly those relating to responsibility for repairs.

As a landlord, being accessible and open to dialogue can improve the relationship with a tenant.

What can go wrong?

Apart from the issue of prompt payment of rent, the parties may have disagreements about the repairing obligations.

It helps if the landlord can offer the holding to let in good condition at the outset. If not, it should be made clear whether the tenant is obliged to improve the holding and maintain it, or keep it as found.

It is essential that a Schedule of Condition is prepared at the outset, which records the state of the holding at the beginning of the term.

This should include soil analyses and be agreed and signed by both parties, to be referred back to when necessary.

Dialogue between the two parties at an early stage and on a face-to-face basis is a good first step, advises Mr Cochrane.

Under the 1995 Agricultural Tenancies Act, there are mechanisms for resolving disputes.

See also: New farm enterprise: Know the legal issues

Legal advice from Ruth Morris, partner, Birketts

Creating a farming agreement

Know the difference between a tenancy and a licence and make sure to choose the right one. Licences are good for simple, short-term arrangements. More than two years and you may end up inadvertently granting a farm business tenancy, requiring not less than a year’s notice to quit.

With a licence, the landowner often retains the management of the land and so can claim the basic payment.

Licences must be non-exclusive, meaning the landowner can go on to the land or allow third parties to use it at the same time as the licensee, as long as it does not interfere with the licensed use.

If the licensee can exclude others from the land and is paying for its use, they may actually have a tenancy.

Beware of licences involving non-agricultural business activities, as these may give the occupiers security of tenure under the 1954 Landlord and Tenant Act. Livery businesses are a common example.

Make sure the licence is clear on the circumstances and notice periods for bringing the licence to an end, even if it is a short and simple document.

Grazing and cropping licences

Grazing licences traditionally allow the grazier’s animals on to the land for a period of less than a year, from early spring to the winter, after which the licence ends and the animals are moved off the land.  This avoids the risk of a tenancy being created.

Profit/herbage agreements work differently in law, by allowing a crop of grass to be taken by grazing animals during an agreed period.

When the landowner is still in legal occupation and responsible for carrying out any necessary management of the crop, the basic payment scheme can still be claimed. 

Usually, conditions placed on the grazier under either type of agreement are minimal and revolve around control and care of their animals and not doing anything to damage the land or the owner’s ability to claim farm payments on it.

With cropping licences, it would be sensible to include clauses on who is responsible for the soil management and preventing the land from being compacted with heavy machinery.

Landlords’ rights and responsibilities

Landlord can only use the rights specifically reserved in the tenancy agreement. Many of these rights, such as access, inspection and repair, can only be exercised on prior notice or at certain times.

Otherwise the tenant is entitled to exclude the landlord entirely until the end of the tenancy term.

This can be important with tenancies that include buildings, particularly dwellings. Landlords can only enter the property with the tenant’s express consent, for the purposes set out in the tenancy agreement. 

See also: So you want to…tap into the Christmas turkey market?

The tenant is allowed to refuse access on reasonable grounds, or if insufficient notice is given. The only usual exception to this is where the landlord is aware of an emergency, for example a fire or major water leak. 

In agriculture, many people are familiar with the old “model clauses” setting out the split of responsibilities between landlord and tenant for repairs and insurance.

These were updated in 2015 to better reflect modern buildings and are included in Agricultural Holdings Act tenancies as standard, and often within farm business tenancies.

Landlords of farms should have third-party liability insurance, as a claim could still be made against them, even with a tenant in occupation.

Taking photographs or otherwise recording the condition of the buildings at the start of the tenancy helps if there are arguments about repair, maintenance or damage later on.

Ending a tenancy

Check the tenancy or licence agreement to see if there are any special notice provisions or service addresses.

Always serve written notice, keeping a record of the date and how the notice was served (first-class post, put through tenant’s letterbox, for example).

Fixed-term farm business tenancies of two years or less end automatically. Longer agreements must be terminated by not less than 12 months’ written notice ending on a term date. 

If you let the tenant stay on after the end of a two-year fixed tenancy, the 12 month notice provisions will apply, so it could be nearly two years before you can get vacant possession.

Accountancy advice from Lisa Oliver, associate director, Hazlewoods

Renting out land on a farm business tenancy (FBT)

Inheritance tax (IHT)

Land let under an FBT will qualify for Agricultural Property Relief (APR) but will not qualify for Business Property Relief (BPR), so any value above agricultural value will not receive any IHT relief.

The other consideration is the farmhouse; assuming the landowner continues to live in the farmhouse, then once they no longer occupy the land they will lose IHT relief on the house. However, if this is the only asset in their estate that does not qualify for relief this may not be a problem.

Income tax

When farming the land in hand, the business proportion of the house and vehicle expenses will qualify for income tax relief against trading profits.

Renting land out on an FBT will not change house and vehicle costs much but you cannot claim these against rental income, whereas if you are a trading business, you would be able to claim a percentage.

Capital gains tax (CGT)

If circumstances change in the future and the let land is to be sold while still let, the land will no longer be considered as a business asset for CGT and reliefs such as Rollover Relief and Entrepreneurs’ Relief are unlikely to be available.

VAT

Generally, rental income from farm land and buildings is an exempt supply for VAT purposes. This means no VAT is charged, and it is not classed as a taxable supply for VAT purposes.

Renting out all the land will lead to deregistration for VAT if the only income is rental income. If part of the land is rented out, this will lead to the business being partially exempt for VAT purposes.

Renting out property on an Assured Shorthold Tenancy (AST)

An AST generally has a minimum term length of six months.

Inheritance tax (IHT)

If property is rented out through the farming business, then provided the partnership is still predominantly a trading business, and the houses are partnership assets, they should qualify for BPR and would not be subject to IHT.

Capital gains tax (CGT)

Any gain on the sale would be subject to CGT. As a rental property is not considered to be a business asset for CGT any reliefs such as Rollover Relief and Entrepreneurs’ Relief are unlikely to be available.

VAT

Rental income from residential properties is an exempt supply for VAT purposes.

Renting out the properties on an AST would mean the partnership would become partially exempt, and consideration would need to be given to whether any of the input VAT on any of the repair costs would be recoverable under the ‘de minimis’ rules.

The de minimis rules allow VAT relating to exempt supplies to be recovered provided it amounts to less than £625 a month and is less than 50% of the input tax incurred in the VAT accounting period.