Farmland investors are taking heed of tax rule
19th May 2009
Val Hutchinson discusses the benefits of investing capital into property.
Investors with capital to plough into property had some good news in the last Budget when the Chancellor gave in to demands to extend inheritance tax rules.
Agricultural Property Relief (APR) for inheritance tax will now cover agricultural property and forestry owned in countries within the EU, not just in the UK.
The European Commission had said the previous system which applied only to inherited agricultural property in the UK, Channel Islands and the Isle of Man, and forestry only in the UK, was discriminatory.
It said the rule was incompatible with the free movement of capital throughout the EU because its limited scope might dissuade taxpayers from investing in agricultural and forestry property outside the UK.
The government’s response was to extend the relief to cover applicable inherited property in all EU member states.
APR is unique in that it carries a very valuable relief for those taxpayers who invest in farmland without actually farming it themselves.
Farmland prices have risen year on year since the 1980s because of the so-called ‘lifestyle farmer’.
They are not working farmers but by parking their capital in land, especially where rents and/or Single Farm payments provided a good return on the investment, they effectively washed out the IHT that would be due.
The upside for the real farming communities has been that tenant farmers have kept their businesses and land prices have remained buoyant for working farmers who own their land.
Those who own estates that have been in the same families for years also benefit as they can maintain the historic farming activities and keep their tenants while still being able to pass on their vast holding to their children virtually free of IHT.
So the new generation of lifestyle farmers is tolerated and welcomed because they help to create demand and therefore keep prices buoyant.
The extension of APR to all investments within Europe for those UK taxpayers liable to IHT would ordinarily be a welcome result for most tax advisers.
It provides new opportunities for the lifestyle farmer and other investors.
However, I should sound a word of casution. This government is opposed to lifestyle farmers and its decision to extend APR to European investments contradicts its usual reluctance to give tax relief for investments outside the UK.
With city bonuses perhaps, temporarily, a thing of the past and the low value of the pound against the euro, it may be that the government was not too concerned about extending the relief within the EU community at this time.
Taxpayers need to hold the asset for seven years to qualify, and in seven years this relief may no longer exist.
It is the landed estate owners and lifestyle farmers who may now have greatest cause for concern. The government has begrudgingly extended the relief into Europe and therefore it is the relief most likely to be pulled once the economy settles down.
Author: Val Hutchinson (info@bhplaw.co.uk)
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