Farm tenancies- Is it time for change?
Many farms are subject to a tenancy of some sort. A farmer who rents his land, a “tenant farmer” will have a tenancy of course. It is also common practice for farming families where, for example, several generations are involved in the actual running of the farming business, either through a partnership or a limited company or even through a trust, but the land they farm is held by only some of the family. In these circumstances, the owner will often let the land to the partnership or company, and this will involve the making of a tenancy agreement.
There are two main types of tenancy that can exist over farmland. Until 1995, it was likely to be an Agricultural Holdings Act 1986 (AHA) tenancy. This Act gave the tenant virtual security of tenure for life, and its provisions were extended by the Agriculture (Miscellaneous Provisions) Act 1976, which provided for rights of succession to the tenancy for the tenant’s family.
This was changed when the farm business tenancy (FBT) was introduced. From September 1995, (subject to some rare exceptions) no new AHA tenancies could be made, although it is still possible to apply to an Agricultural Lands Tribunal for a direction to succeed to an existing AHA tenancy.
There are several differences between AHA tenancies and farm business tenancies. In contrast to the considerable security of tenure under the AHA tenancy, most farm business tenancies will provide that the landlord may obtain vacant possession within a maximum of 24 months.
However, the inheritance tax position on the death of the owner is much more favourable under an farm business tenancy, since land held this way is eligible for inheritance tax relief at 100%, whereas if held under an AHA tenancy, it will only receive relief at 50%.
For the true tenant farmer this does not matter, assuming his landlord’s estate has the means to pay the IHT bill. But in a family farm, the results of having a 50% IHT liability could be disastrous, especially where there is the potential for development in respect of some part of the farmland.
Therefore, the farmer who is advancing in years may well consider that he or she should take some action to mitigate the impact of IHT, and this may mean consideration of the surrender of the AHA tenancy, and substituting for it an farm business tenancy.
There can be problems with this course of action, principally the possibility of a capital gains tax (CGT) liability arising. However, there are ways of mitigating the impact of CGT, and each case needs to be considered on its merits, particularly if the IHT bill is likely to be large in comparison with the amount of CGT payable.
If you would like to discuss your farm tenancy arrangements or discuss inheritance tax planning, please contact James Carr on 01785 211 411 or email firstname.lastname@example.org.
The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. The law may have changed since this article was published. Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances. (50587)