Agricultural land values have soared over the past decade to a record high of over £4,800 per acre upon average, as a result of agricultural land being viewed as an alternative investment due to favourable tax treatments it receives.
City financiers and investors have been snapping up agricultural land because of the huge tax perks, with the main one being business-asset taper relief, where investors have been able to claim a 10% tax break on any profits from land that was let or contracted to a farming business.
According to Giles Wordsworth of Cluttons, ‘On an investment basis there is no rhyme or reason for the value of agricultural land, which has probably been above its true value for a number of years now, for two main reasons: the wealthy like to buy houses surrounded by land, which is currently I short supply; and the enormous tax advantages in owning agricultural land.’
Changes brought in during Alistair Darling’s pre-Budget report could change this.
Previously assets classed as “non-business”, could only benefit from taper relief after three years, so if an investor were to sell an asset in the fourth year, he or she would pay tax on 95% of the gain, falling to 60% if he had held the asset for 10 years or more; equivalent to an effective tax rate of 24%.
However, up until now farmland has been classed as a business asset, and taper relief kicked in sooner, so an investor need only have owned the asset for two years to be eligible for full relief; with a higher-rate taxpayer effectively paying just 10% Capital Gains Tax on any gains, hence agricultural lands attractiveness to City financiers and investors.
From 6th April 2008 this tax perk will change when taper relief is abolished and CGT moves to a new single rate band of 18% on all asset classes.
This is still good news for those seeking an effective vehicle for tax relief but a potential disaster for anyone farming all their life and now wanting to retire. This may restrict supply although in the short term we may see some sales as investors seek to cash out assets in the next six months.
‘Whilst City money is important, it is wrong to assume that it dominates the market’, says Gerald FitzGerald, partner in Cluttons rural division. ‘Traditional farmers have staged a bit of a come back over the last six months, partly on the back of rising commodity prices, and account for approximately 50% of the acquisitions market at present’.