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How will Brexit, subsidies and tax impact farmland value?

How will Brexit, subsidies and tax impact farmland value?

Thursday, 19 November 2020

The UK agricultural industry is going through a radical change with its biggest shake-up since the 1970s. Although farmland value appears to be holding steady, the additional uncertainties surrounding Brexit and the impact of COVID-19 have had an effect, with the amount of farmland reaching the market in 2020 down significantly on last year. Anecdotally, this may be due to a possible increase in private off-market sales which are not reported.

Farmland has been a safe and reliable place to invest in the last 15 years, with values increasing from around £2k/acre up to nearly £7k/acre average today. Part of the reason for the increase is investors looking for safe and reliable investments after the financial crash of 2008, as land has outperformed the global equity markets and gold in the last 12 years.

Subsidies

Since the introduction of the single farm payment (SFP), now known as the Basic Payment Scheme (BPS), subsidies for farmland have been area based. Farmers and landowners are paid based on the land area they own/farm, which provided a guaranteed return, plus it created a market for the BPS entitlements. All of which created value in owning farmland.

The significant change in subsidies from land area to a greater focus on the environment within the Agricultural Act could see the desire for farmland reduce as the returns diminish, yet the green revolution may bolster the market. The growing market around carbon credits and carbon offsetting may see larger corporations looking to buy farmland for woodland creation or farmers themselves converting less productive land into woodland under the new Environmental Land Management (ELM) schemes. The NFU has previously published a report with the aim of UK agriculture being net carbon zero by 2040.

Brexit

Will Brexit see farmland value decline? Possibly, but not to a great extent. The UK sees approximately 50% of buyers coming from overseas and this could fall once the transition period ends on Jan 2021, thus creating a shortfall of demand in the market. There are certainly farmers in the east and across the UK who wish to expand and buy more land as well as other investors who desire a country estate, including some lifestyle buyers. We must remember, land is a finite resource and we cannot create more.

Tax

When discussing farmland values, we mustn’t forget to mention tax! For many years now, agricultural land passing from generation to generation has been largely tax free via Agricultural Property Relief (APR) or Business Property relief (BPR), and both have been a useful tool within estate planning. Yet the All-Party Parliamentary Group (APPG) for Inheritance and Intergenerational Fairness suggested, in January 2020, the possibility of abolishing APR in favour of the option to pay tax across 10 years in equal instalments. In addition, the tax-free uplift to probate valuation on death may also be set to disappear.

As I write this article, the Office of Tax Simplification (OTS) has just published a paper recommending that capital gains tax rates be aligned with income tax rates which may push farmers and landowners considering an exit to speed up their plans or push for development land sales before any future changes. Furthermore, they also recommended abolishing the tax-free uplift for asset base cost on death, again a useful tool for the next generation taking on land and then selling posthumously. We must remember the OTS is a not an elected group of individuals and, therefore, we cannot be sure how much change will happen or when it might happen; it could be as soon as the Spring Budget in 2021.

Location

Clearly, there are many contributing factors towards land value, whether it be agricultural or development value, but a final key factor is location. Any farmer aiming to buy land next door will pay a premium compared with a buyer from outside the area, and location is key for development land in order to obtain the necessary planning permissions.

Farmland purchases or sales are likely to remain large sums of money for the foreseeable future, Brexit or no Brexit; therefore, any such transactions should be discussed with a professional advisor to make sure you get the best outcome on value and taxation for your particular needs.

If you’d like further advice regarding your agriculture property or business, please speak to a member of the Farms and Landed Estates team. You can find contact details on the Our People section of the Larking Gowen website. Alternatively, call 0330 024 0888 or email enquiry@larking-gowen.co.uk.

Laurie Hill

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