Land price dilemma: Should farmers cash in or not?

With farm commodity prices at rock bottom and land prices at an all time high, some landowners may be considering selling part or all of their holding. Our expert offers some advice.

The statistics are well documented but since 2010 the average value of land sold in the UK on a per acre basis has more than doubled while farmgate prices across all sectors are currently facing some of the toughest conditions for years.

With world stocks of most agricultural products outstripping demand, it is difficult to see what will cause prices to improve substantially.

Many farmers and landowners may see this current imbalance between asset values and profitability as a trigger to sell part or all of their holding.

David Merton
Partner and head of rural property
Fisher German

In considering this option, they should properly analyse a number of factors, including the following:

Value

This may seem obvious but not all land is worth the values achieved where a wealthy investor has approached a neighbouring owner to add land to their estate.

However, very often land does sell at near the guide price so obtaining a realistic sale value is essential.

Sellers also need to understand that the market is very localised, so they should be provided with a realistic valuation of their property from the outset.

Lotting

It is important to have an understanding of potential local buyers and ensure that an early sale of one part of a property does not diminish the value of the rest.

Taxation

Just as many potential purchasers are driven by taxation reliefs provided by land, anyone thinking of selling land must plan to ensure they maximise the reliefs available to them.

Currently, high land values will increase charges from capital gains tax. However, this can be mitigated by entrepreneurs relief.

Be aware though that rollover relief may not be applicable where a seller wants to retire or realise cash to pay back borrowings.

Farmland in the main provides substantial relief from inheritance tax, but converting this asset into cash will potentially expose it to this tax.

However, if the property will have to be sold at some stage to provide, for example, income or gifts to children, then it may be the right thing to do to sell now in order to give time to reduce the cash held in the seller’s estate on death.

Bank borrowing

With interest rates at such low levels, selling part of a unit may improve business profitability in the short-term if the interest saved on farm borrowings is greater than the margin foregone from farming more land.

However, increases in bank base rates look almost certain within the next 12 months and this will substantially affect the marginal analysis.

A 0.5 % increase in the base rate could add between 10% and 20% to current interest costs.

In addition, banks are now reluctant to fund unprofitable businesses and may decline requests to extend or review overdraft facilities.

Businesses should plan to avoid being in this situation and realising assets to pay down borrowing may be part of this plan.

Property details

The detail in every land sale is critical – so many sales lose momentum due to information being unavailable or inaccurate.

Including correct information about things such as land registry, subsidies and wayleaves before the sale process starts will pay dividends later.

Family

Selling will always be a big decision and generating cash within a family can cause problems as well as opportunities.

Some consider an opportunity for exit through a sale and leaseback.

In this situation the terms define what value the seller receives but it allows for ongoing occupation of the property for an agreed period.

Most farming families understand the desire to keep the property intact and that this may lead to an uneven distribution of assets.

However, the same principles are unlikely to apply if the property is sold.

The decision will also impact on employees so you need to consider this, too.

Advisers

If you decide to sell, make sure that you use advisers who you trust to deliver the desired result. The process may take time to complete, it will very often be complex and inevitably there will be difficult situations to overcome.

Tenants

Farming tenants may also have the opportunity to benefit from high land prices as existing or prospective landowners may be prepared to pay a proportion of its current value to secure vacant possession.

In summary

Overall, current high land values should present a significant opportunity for many farm businesses and landowners.

But you should consider the option to sell in this light rather than simply being a way of addressing low farmgate prices.