Investors drawn to farmland

Mark Twain once said “buy land, they’re not making it any more” – and it seems private investors share his view. Many are now taking advantage of predicted rises in rural land prices, and favourable tax breaks.

Farmland values have increased by 134 per cent in the past ten years – the fourth fastest decade of growth since 1800, according to the latest Savills agricultural land survey. But while the average value of UK farmland hit £5,000 an acre last year, analysts forecast that prices could rise another 40 per cent by 2015.

“Interest from investors has grown as farmland prices have risen, residential property has dropped by 20 per cent and commercial property has fallen by 40 per cent,” says Mark Ashbridge, head of rural lending at Savills Private Finance.

He expects prices to continue rising as demand outstrips supply. “The volume of publicly marketed farmland remains very tight,” he says. “Across Britain, 143,000 acres were publicly marketed during 2009, compared with just over 193,000 acres during 2008 – a fall of 26 per cent in one year.”

New research from the Royal Institution of Chartered Surveyors (RICS) supports this view. “Those with land are loath to dispose of it, and those without, or with a limited supply, are keen to get into the market and capitalise on its rising value,” says Sue Steer at RICS. “Couple that with the fact that farmers are increasingly optimistic about the outlook for agriculture, and an investment in pasture or arable land is an attractive prospect.”

Another reason individuals are keen to buy land is that farming offers relief from inheritance tax (IHT), income tax, and capital gains tax (CGT). Accountants are already reporting a surge in interest from high earners looking for shelter from imminent tax rises.

“Farmland qualifies for agricultural property relief, so there is no IHT after two years, providing you farm the land yourself or take some farm-based risk, such as a contract farming arrangement based on shared profit,” explains Mike Harrison of accountants Saffrey Champness.

“If you’re a wealthy businessman and have £10m of assets, then you might well buy a £5m farm and farm it for two years. As long as you structure it correctly, you will get the reliefs.”

He says that, for IHT purposes, farmland can also include woodlands on the farm and buildings used in connection with the farming business – as long as these have a “character appropriate to the farmland”.

But the farm must be run as a commercial business to qualify for the reliefs. “HMRC has specific legislation which disallows farm loss relief against general income if the farm has made losses in the five previous years,” Harrison says. “It also applies restrictions if it thinks that it is not being run on a commercial basis.”

For those who want the tax relief without getting their hands dirty, there are ways around this. “If you have deep pockets, then you can buy a farm and pay someone else to manage it and enjoy the lifestyle associated with that investment,” Harrison suggests.

For those with less money, or those who want to invest in farming via an investment portfolio, there is also the option of investing via a fund – where all the management and administration is done and the entry price is lower than for direct investment.

Close Asset Management last month said it would be investing £5m into commercial farming through its Close Trading Companies vehicle. This is an IHT-mitigation scheme that offers asset-backed opportunities for a minimum investment of £100,000, allowing investors to defer or reduce a potential IHT bill.

Another fund giving exposure to farmland, and qualifying for IHT relief, is the Braemar UK Agricultural Land Fund.

But Danny Cox, head of advice at Hargreaves Lansdown, says investors must also factor in the risks. “There are pitfalls such as potential liquidity problems with investing directly in farmland.”

Reliefs available:

Inheritance tax relief

Where the property and land are both used for commercial farming, IHT relief is 100 per cent. The farmland must either have been farmed by the owner, or someone on behalf of the owner, for two years.

Capital gains tax relief

If the land is commercially farmed, whether by the farmer or contracted out, there are three CGT reliefs when the property is sold or transferred.

● Rollover relief: The gains incurred from the sale of anything relating to the farm can be rolled over as long as they are reinvested elsewhere on the estate, thus avoiding CGT at 18 per cent.

● Holdover relief: This relief works in relation to people putting farmland or property into a trust or transferring it into another person’s name. For example, if a father was transferring the farm into his son’s name, the taxable gain could be deferred until the son sold the farm.

● Entrepreneurs’ relief: This relief gives an effective tax rate of 10 per cent on certain business disposals, up to a lifetime limit of £1m of gains per individual. However, it is only for business assets, rather than property, such as selling a part-share in the working farm’s profits.

Income tax relief

HMRC allows relief for losses from the farm to be set against other income, but only for a maximum of five years. After five years of losses, HMRC deems the farm a “hobby” rather than a business.