BR November

23

THOUGHT LEADERSHIP

The government’s renewed focus on environmentally beneficial uses of land has raised concerns among landowners that the change of use could make their land (along with any associated farmhouse and buildings) lose its favourable tax status under the Agricultural Property Relief (APR) and Business Relief (BR) schemes.

Inheritance tax and farmland in environmental agreements

The Background

Several factors see lively discussion of the potential for rural land to provide environmental benefits whether under state schemes or for commercial reward.

As post-Brexit agricultural policies develop, so the almost pure subsidy income of the area-based Basic Payment either carries more cost (as planned in Scotland) or is withdrawn (as has now started in England). That leads to farmers, especially on more marginal ground reappraising their businesses, some looking to environmental income.

The intertwined issues of mitigating and adapting to climate change, biodiversity, water and air quality all drive new questions for farming.  The still very fledgling markets in carbon, biodiversity net gain and nutrient neutrality to protect water are attracting interest but, often ignorant of what might be involved, the risk is of deals that might be regretted.

Carbon offsetting looks much less valuable than the need for farmers to reduce their own carbon.  There may be value in biodiversity net gain and nutrient neutrality but their markets may be smaller than people think.

Nonetheless, agreements can be made to commit farmland to create habitats, sequester carbon and offset nutrients.

JEREMY MOODY

SECRETARY AND ADVISER AT THE CENTRAL ASSOCIATION FOR AGRICULTURAL VALUERS

The Problem

Inevitably taxation, notably Inheritance Tax, is a factor in this decision making.

While tax should not drive doing something, it can be a powerful incentive not to act.  Farmland, with a capital value disproportionate to its income potential, is particularly exposed to IHT’s 40% tax charge, making access to Agricultural Property (APR) and Business Reliefs (BR) important.

As the Treasury has said, they exist:

Where do environmental uses and agreements sit in this?

Agricultural land or pasture occupied for the purposes of agriculture is, subject to certain conditions, eligible for 100% APR
on its agricultural value (50% for land let before 1995).  APR can
then apply to agricultural buildings occupied with that land and
to a house used for the day-to-day management of that land
(a farmhouse).

BR, with 100% of market value at stake, requires the operation to
be predominantly an active business, not investment. Diminished business activity or letting land to an environmental manager may risk that.

If the land moves to a less intensive agricultural use, the purpose
of the occupation could be environmental or agricultural according to the facts.

Many lesser changes with farming continuing might not, on analysis, disturb APR or BR but issues could lie with:

Such uses, however much needed by society, risk the owner no longer having agricultural land (for APR) or a business (BR).

In particular, the prospect of losing APR is a real and significant barrier to landowners who might otherwise participate in such schemes.  That hinders the delivery of the Government’s environmental policies.

“To ensure agricultural businesses or farms do not have to be sold or broken up following the death of the owner.” (Non-Structural Tax Reliefs and Objectives, November 2021)

DEFRA’s proposed Landscape Recovery and Local Nature Recovery Schemes should continuing agricultural use be incompatible with the commitment

agreements that take farmland out of agricultural use to help meet nutrient neutrality requirements or for Biodiversity Net Gain

agreements to restore peat that make it unfarmable wetland.

The Answer

One answer to this is to adapt the existing model of the now largely redundant s.124C of the Inheritance Tax Act 1984 added in 1997.  This provides that land in agreements under specified Habitats Regulations is regarded as agricultural land and that this use is an agricultural use for Inheritance Tax.

The CAAV proposal is that land in recognised environmental agreements be similarly deemed agricultural for APR so, as an illustration, benefitting land:

in an agreement under a financial assistance scheme under the Agriculture Act 2020 subject to a conservation covenant under the Environment Act 2021 on the prospective Biodiversity Net Gain register.

With a similar provision also made in 1995 for short rotation coppice, this offers a straightforward “oven-ready” answer, giving a simple and very strong signal to landowners that the tax system supports the Government’s objectives here, not hindering them or creating uncertainty.

The importance of APR was shown in 1995 when England’s tenancy reform was supported by the extension of full APR to newly let land.  That combined legal and fiscal reform turned the haemorrhaging let sector round to attract new land and grow.

Using APR here would remove a reason for landlords to constrain tenants’ environmental commitments and cover leases to environmental managers – varying BR with its wider effects would not assist with either.

This implies that a change to APR seems more appropriate than a change to BR.

APR is specific to agricultural land and so changing it would touch on the larger BR regime for every privately owned business. At the same time, BR’s awkwardness with let property helps neither an agricultural landlord nor the farmer willing to let a significant part of the land to an environmental user (such as a habitat bank).  APR (since 1995) is tailored to enable both of those options.

The irony is that, without such a measure, farmland is more likely to remain fully farmed and so qualify for APR anyway with no wider environmental benefit.   This answer would open markets with little tax cost.

www.caav.org.uk01452 831815enquire@caav.org.uk

Editor’s note:

There have been a number of grey areas and tax cases where HMRC has refused BR where the trades of businesses were fundamentally based on letting land with other services. In fact, the OTS’ first report of its IHT review, published in November 2018, recommended that the government should consider whether to align the IHT treatment of furnished holiday lets with that of income tax and capital gains tax, where they are treated as trading providing that certain conditions are met.

For the purposes of BR, the activity of running furnished holiday lets is generally not a qualifying trade. Since such companies are treated as trading for income tax and CGT purposes, the OTS recommended that this is extended to Business Relief. This would immediately remove substantial complexities in BR and could have positive implications for multiple other land-based activities and their Business Relief qualification. To date, this has not been implemented, likely because it would be expensive to implement, and at a time when politicians are usually trying to penalise the ownership of second homes as part of their efforts to free up housing stock, this would be a surprising turnabout.

Therefore, the suggestion to tweak APR in the way suggested by CAAV may be better received by government and more likely to ensure that at least one of the reliefs covers the environmental activities that meet the UK's sustainability drive.

To find out more about the relevant tax cases, see:

BR Guide (3rd edition)
BR Guide (2nd edition)
BR Guide (1st edition)

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6. What's on the Horizon

Inheritance tax and farmland in environmental agreementsWhat the Managers Say

21

BR comparison table

MANAGER NAME

DESCRIPTION OF OFFER

PROVIDER YEAR FOUNDED

PROVIDER ASSETS UNDER MANAGEMENT

PRODUCT ASSETS UNDER MANAGEMENT

SECTOR

LAUNCH DATE (OF SERVICE)

NUMBER OF INVESTEE COMPANIES

ANNUAL RETURN SINCE INCEPTION

TARGET ANNUAL RETURN AND/OR TARGET YIELD (WHERE STATED)

MINIMUM INVESTMENT

INCOME AVAILABLE?

NUMBER OF DIRECTORS

LEGAL STRUCTURE

INITIAL FEE

AMC

PERFORMANCE FEE

PERFORMANCE HURDLE

TARGET LIQUIDITY

Blackfinch Investments Ltd

The Adapt IHT Portfolios are our flagship Inheritance Tax (IHT) solution and are well established. It offers return potential and competitive charges alongside a route to IHT relief. Our four model portfolios cater to the need for diverse, ethically focused IHT offerings. Blackfinch only takes its annual management fee of 0.5% plus VAT after achieving a minimum target return of 3% p.a., 4% p.a., 4.5% or 5%+ p.a., depending on which of the four model portfolios an investor has selected.

1992

£692m (as at 08/08/2022)

£300m (as at 08/08/2022)

Asset-backed lending, property development
finance and renewable energy generation

December 2013

3 underlying companies.

Refer to our monthly factsheet/quarterly performance sheets for latest discrete annual performance figures. Annualised return figures for each of the portfolios since inception (as at 30/06/2022) are as follows:
Ethical: 2.95%
Balanced: 3.84%
Balanced Growth: 4.28%
Growth: 4.71%

Ethical 3%
Balanced 4%
Balanced Growth 4.5%
Growth 5%+
All targets are net of fees

£25,000

We do not have an income portfolio, but regular withdrawals can be facilitated on a quarterly, semi-annual or annual basis

We have two directors involved in this product, as well as two independent directors across the three investee companies, where the same internal and external director will represent both lending companies.

Discretionary Portfolio Service

2%

0.5% + VAT deferred until exit and only if target return has been achieved

N/A

N/A

2-4 weeks

TIME Investments

TIME:Advance is a simple and effective IHT solution that uses BR to help investors potentially mitigate their IHT liabilities. The service invests in a diversified portfolio of asset-backed businesses and targets a net return of between 3% and 4.5% p.a. The service has received consistent industry recognition, with multiple wins at both Investment Week’s Tax Efficiency Awards and the Growth Investor Awards.

2011

£4.5 billion

£975 million

Renewable energy (wind, solar, hydro & biomass), secured property lending, operational real estate finance, self-storage and commercial forestry.

February 2013

We currently choose to invest in one company, Elm Trading Limited.

4.56%

3% - 4.5%

£25,000 (£10,000 top up)

Yes, by regular withdrawal option (no dividends paid) available on a quarterly basis.

4 directors & independent advisory panel of 6
3 Non-Exec Directors

Discretionary Portfolio Service

2.5%

0.5% (inclusive of VAT) and deferred until exit and only payable from the excess over a return of 3.5% p.a.

N/A

N/A

We aim to facilitate a dealing event on a weekly basis every Tuesday and pay out redemptions within two weeks (subject to liquidity).