It provides landowners with relief from Inheritance Tax on 50-100% of the agricultural value of their property. This is a valuable concession as it allows landowners to pass on land, which has a high capital value relative to its earning potential, to the next generation. It also encourages landlords to rent land out and so helps maintain a healthy tenanted sector. It is a key policy responsible for maintaining farming systems which characterise our countryside.
The relief was under threat as the EU Commission considered that it was not compatible with the free movement of capital as it only applied to farmland in the UK and so dissuaded UK taxpayers from investing in land overseas.
The change creates two main opportunities:
First, as the amendment is being backdated to April 2003, landowners with overseas agricultural assets should review their tax history if they have paid tax in respect of transfers in life, on death or charges on settled property during this period as they may be able to reclaim Inheritance Tax paid.
Second, there is now an opportunity for UK taxpayers to invest in agricultural property overseas and qualify for tax relief even if the asset is tenanted.
Gerald Fitzgerald, of Smiths Gore’s Property Investment and Management team, said: "This is a major concession and will be a significant attraction to people wanting to invest in or enjoy rural property elsewhere in Europe. It now allows them to do this and use efficient tax planning to reduce their Inheritance Tax liabilities.
"The change will give landowners a much wider range of options, including the possibility of acquiring a farm in places such as France or Italy. However purchasers should be aware of the increasing difficulties associated with qualifying for Agricultural Property Relief – but this can be considered before a purchase takes place."
The Chancellor also took the opportunity to deal with an unfortunate effect of a High Court case on the charging of VAT on farm rents.
The case, Mason v Boscawen, created uncertainty in relation to the Agricultural Holdings Act rent review cycle as it suggested that the reduction in the VAT rate in December amounted to a rent review and therefore prevented rent arbitration within the next three years.
This had the effect of adding delay and confusion to the many rent reviews being negotiated, which was the most active period for rent reviews for at least 10 years.
It was also feared that when the VAT rate reverts to 17.5% in January 2009, the change would again amount to a rent review, thus preventing reviews for a further three years until January 2012.
The issue has been resolved as the Budget amended the Agricultural Holdings Act 1986 to the effect that a change in the rate of VAT or opting to tax will not re-start the three-year rent review cycle. Therefore the AHA rent review cycle can continue to operate as originally intended.
Rupert Clark, Head of Smiths Gore’s Rural Practice team, said: "This is a really welcome change, which will make concluding rent reviews easier as it removes one of the potential barriers. It has been the busiest period for reviewing agricultural rents for 10 years.
"Rising commodity prices and farm incomes prompted many landlords to serve notices for rent reviews and we have carried out over 300 reviews throughout the United Kingdom. A lot of the reviews have been agreed although there are still quite a few to agree this spring.
"There have been significant increases in rents for all farm types and in all regions. Across the United Kingdom the average increase has been 28%, which has lifted the typical rent from about £49 per acre to over £60."
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