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TRIG TAX WORKING GROUP

WORKING GROUP ON TAXATION AND TENANCIES

FINAL REPORT – 8TH OCTOBER 2017

Introduction and Overview: Problems and the Answers

The Working Group focused on the potential for taxation reform to improve the let sector and

the conditions for enhanced productivity in it.

The key questions are:

- to have the best farmers farming – the “who” of farming. The Group noted the Irish

finding that there was on average a 12 per cent gain in output from moving land into

the hands of the trained, compared with a 4 per cent gain from it moving from the over

65s.

- to give them the framework supporting improvement in productivity and innovation –

the “how” of farming. That was seen to require facilitating investment and flexibility.

With the major liberalising reform of 1995 having introduced Farm Business Tenancies (FBTs)

and so removing the major legal obstacle to new lettings, taxation has remained an important

area for review with significant potential to remove further obstacles to the functioning of the

let sector.

What can be done through taxation policy to improve both the “who” and the “how” of

farming? The answers are seen to lie in encouraging:

- the flexible movement of land into the occupation of those best suited to improve

productivity and innovation, in part using this as a means for retirement

- productive investment, especially in new technologies

- diversification of land use by removing the obstacles in the taxation system.

It is emphasised that these are proposals about land occupation and land use. The ownership

of farmland and it use have been separating for some decades and that trend seems likely to

continue and probably accelerate – making farming more like other sector in it use of premises

owned by others. Tenancies give a good structure for that which make it important to have

owners, including those who might wish to retire from farming, willing to let.

In our consideration we were greatly assisted by:

- the analysis and experience of the Irish Republic’s agri-taxation review of 2014, the

resulting measures introduced for 2015 and the first reports of their effect

- the CAAV’s Agricultural Land Occupation Survey giving the ability to undertake

some modelling.

Proposed Reforms - The full report of the Working Group sets out the range of measures that

it considered together with the issues and arguments attending them, with individual members’

stances recorded as appropriate. This summary focuses on those measures that:

- appear likely to make a significant change and deliver improvement

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- carry substantial enough assent.

These are:

1. Limited Income Tax relief on farm land rents to encourage letting and letting for

longer. Evidence from Ireland shows this can have a powerful effect. It could be seen

as creating a retirement package with the new Residential Nil Rate Band Amount on a

house passed down the family. See 5.2 and 3.24-3.27.

2. Recognising a business with multiple trades, including property income, as a single

trade for Income Tax, easing letting and diversification. See 5.3 and 3.4-3.7.

3. Capital allowances to support investment with restoration of the Agricultural

Building Allowance, the ability to carry forward the Annual Investment Allowance and

extended/simplified allowances for the new technologies. See 5.4 and 3.30-3.32.

4. Capital Gains Tax Rollover Relief – allow reinvestment in improvements to let

farmland. See 5.5.1 and 3.28-3.29

5. SDLT – exempt leases of agricultural property, to remove a deterrent to a tenant

taking a longer lease. See 5.6 and 3.22-3.23.

6. VAT – raise the de minimis threshold for partial exemption – easing complications

where a letting includes a dwelling or a business includes let land but has not opted to

tax. See 5.7.

7. The Group does not recommend excluding land let for less than a 10 year term from

APR and the majority would recommend against that, seeing the consequential loss of

flexibility and the reduced size of the let sector to outweigh the benefit for those who

secure longer tenancies. See 5.8, 3.11-3.19 and the Annexe.

In the specific context of seeking to create the greatest opportunities to improve

productivity using the let sector, the two most powerful tools are:

- an effectively designed Income Tax relief on farm rents which the practical

experience of the Irish reform shows to have the capacity to bring about change

enabling that improvement

- an improved capital allowance regime covering buildings and innovation

investment which could unlock much private capital and initiative in a way that grants

might not.

I am also happy to adopt the point made in later discussions in the AHA Working Group that

its proposal for the conversion of an AHA to a fixed term AHA (that report’s Item 9) with a

fixed term and market rent should be accompanied by an extension of the 100 per cent rate of

APR that applies to post-1995 tenancies. (See Section 6 below)

If we can unlock and enable a larger let sector that promotes good farmers who can invest

and adapt flexibly to change and deliver innovation we will have achieved a lasting benefit

for agriculture.

Jeremy Moody

Secretary and Adviser, Central Association of Agricultural Valuers

Chairman, TRIG Tax Working Group 8th October 2017

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CONTENTS

1. The Working Group

2. Preliminaries

3. General Discussion

(i) Composite Businesses

(ii) Agricultural Property Relief (APR) and Business Property Relief

(BPR) from Inheritance Tax (IHT)

(iii) Limiting APR to Longer Leases

(iv) Post Death Conditions for IHT Reliefs?

(v) Rental Income as Trading Income

(vi) SDLT

(vii) Graduated and Capped Income Tax Relief on Rents

(viii) (Rollover Relief from CGT

(ix) Investment Allowances

4. Next Steps

5. Conclusions and Recommendations

5.2 Income Tax Relief on Rental Income from Farmland

5.3 Recognising Composite Trades as a Single Business for Income Tax

5.4 Capital Allowances

5.5 Capital Gains Tax

5.6 SDLT

5.7 VAT

5.8 Excluding APR for Land Let for Less than 10 Years

6. A Final Point – Converted AHA Tenancies and APR

Annexes

1. A View of Productivity (The Note Put to the First Meeting of the Working

Party)

2. Modelling by the CAAV for the exclusion of APR from lettings under 10

years

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1. The Working Group

The Working Group, comprising Jeremy Moody (CAAV, Chairing). Marianne Barrett Rogers,

Mike Holland (ALA), Louise Speke, Andrew Shirley, James Dennis (CLA), Michael Parker

(NFU) and George Dunn, James Gray (TFA)., met twice in August to consider the concepts

floated in this note, e-mail exchanges and a further meeting to look at matters in more detail.

Each proposal is to be tested for its potential contribution to future productivity.

2. Preliminaries

The Working Party received an initial background paper from Jeremy Moody and noted:

- analysis suggested that improving productivity turned on skills, investment and the

character of the business owner

- the Irish agri-taxation study pointing to the greatest improvements tending to come

from land moving into the hands of those who were trained

- the work of the Irish Agri-Taxation review, the subsequent taxation changes there and

the extent to which they appear to have effected a significant change

- the desire for recommendations that would make substantive changes to support the

aim of improved productivity (as reviewed in the Annexe).

3. General Discussion

3.1 The remit of the working party turned on the distinction between the ownership and

occupation of farmland. What might encourage older farmers to let, rather than continue to

farm and sell up. Family succession in owner occupied business was outside the working

party’s scope.

3.2 While estates and institutions provided a core of the let sector much land did and could

still come from smaller private landowners and farmers who chose to retire. What would most

effectively encourage that latter group to let and let longer?

3.3 The general discussion over the two meetings reviewed the following areas.

(i) Composite Businesses

3.4 Both prospective landlords and tenants’ own businesses face problems with the taxation

of income for composite businesses with different income streams being treated differently,

even if within the same VAT registration:

- where, in diversifying, they include one or more trades other than farming with

restrictions on sideways loss relief and the prospective problems of reporting on

multiple trades under Making Tax Digital, especially on allocating common overheads.

- where they include both property and trading income with disadvantages in the current

inflexibility over differential losses and profits under the remains of the historic

schedular system for Income Tax.

The Group did not see why someone should be so hampered for diversifying or letting land

out.

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3.5 A landowner with other trades who was considering letting land to a farming tenant

was likely to find the inflexibilities here awkward. A tenant’s developing business might also

be in the same position. The new restrictions on Sideways Loss Relief, limiting the scale of

losses that could be offset against profits from other trades of the same business in the same

year, posed issues for diversification as new ventures often lose money in their early years.

3.6 The OTS had proposed changes to bring simplification and flexibility for such

interdependent businesses under Corporation Tax but these had not as yet been suggested for

Income Tax. Changes to allow recognition of a composite business with flexibility over

property and trading income would be helpful for diversified businesses.

3.7 In looking at further flexibility, the Group was conscious that farming is statutorily

defined as a separate trade for Income Tax and then has a number of specific provisions, such

as averaging, the herd basis and the hobby farming exclusion.

(ii) Agricultural Property Relief (APR) and Business Property Relief (BPR) from

Inheritance Tax (IHT)

3.8 It was noted that agriculture shares BPR with other privately owned businesses. If BPR

were taken first, it would be seen that APR’s actual benefit was, often limited, relief:

- to qualifying farmhouses

- where the business consisted predominantly of let farmland, important for fiscal

neutrality between forms of land occupation.

3.9 Matters could be complex where owners need to consider the interactions between

APR, BPR and Conditional Exemption, requiring an understanding in the round of how any

changes might work.

3.10 It was wondered if BPR might recognise the business function of a qualifying

farmhouse, perhaps on the same basis as VAT allows a fraction of house costs.

(iii) Limiting APR to Longer Leases

3.11 This discussed the proposals set out by the TFA in the taxation part of its FBT 10+

proposals:

“(a) Restricting the generous, 100% Agricultural Property Relief from Inheritance

Tax (currently available to all agricultural landlords, regardless of the length of

time for which they let land) only to those landlords prepared to let farmland for

10 years or more (excluding rotationally let land on short terms for vegetable

and other high value crops).

(b) Clamping down on those land owners who, through schemes promoted by

agents and accountants, are using share farming, contract farming, share

partnerships and grazing licences as thin veneers of trading activity and as

vehicles for aggressive tax avoidance where they take no risk in the business,

have little, if any, entrepreneurial input and lack any management control.

(c) Offering landlords prepared to let farm land for 10 years or more the ability to

declare their income as if it was trading income for taxation purposes.

(d) Reforming Stamp Duty Land Tax to end the discrimination against longer farm

tenancies.”

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3.12 The APR change in these proposals was not presented as the only option but as a means

to promote longer tenancies without a legal bar on shorter lettings, a means to create an

environment in people do the “right thing”. The suggested exemption where land had been let

for specialist cropping was noted.

3.13 In the second meeting, the TFA indicated that:

- it envisaged this only applying to leases granted after the date of the change (as in 1995),

and so not retrospectively

- it could support a graduated phasing of APR for lease between 5 and 10 years on the

model similar to the rule for Potentially Exempt Transfers (PET), so that land let on a

lease for 6 years might have 20 per cent APR, one for 7 years 40 per cent APR, and so

on.

3.14 With a consciousness of the possibility of unforeseen effects, there were opposing

concerns that while some owners, such as some estates would respond others might move from

letting or not choose it, preferring the relief from BPR whether by remaining in hands-on

farming or by other arrangements (these potentially also delivering the productivity goal).

Before 1995, owners had avoided the greater imposition of life time security by letting for

periods of less than 2 years (Gladstone-Bowers). As an overall outcome, that could be seen as

counter-productive, albeit that some tenancies would be for longer.

3.15 With repeated concerns expressed about the need for flexibility over lengths of letting

to suit both tenants and landowners, it was wondered if any withdrawal of APR might be

graduated by the length of the letting?

3.16 What were the reasons why private owners did not let for longer? With land as a

relatively illiquid, low yielding asset, some owners were cautious of the risks of being caught

by later changes in tax or legislation. Owners wished to have a sense of control over their own

assets. Periodic changes in support regimes linked to land occupation fed that concern. Agents,

whether by reflex, inadequate instructions or owner/farmer clients avoiding cost, were not seen

to be using the flexibility of FBTs proactively.

3.17 Alongside the CAAV 2016 Survey, there was a perception of a move towards longer

lettings for soil management, investment and other reasons.

3.18 Other potential changes outside tax, such as the possibility of early resumption clauses

for FBTs, were also relevant to what could happen.

3.19 A key conclusion from the initial meeting as the value of some modelling of the possible

outcomes of excluding APR from land let for less than 10 years. Initial modelling was done

and circulated between the meetings and then discussed at the second meeting after which the

annexe to this report was developed further.

(iv) Post Death Conditions for IHT Reliefs?

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3.20 After a little discussion of the Irish and Dutch requirements for land to be used for

farming after death to merit relief, this was not seen as a problem since land did not generally

drop out of farming use whether kept in hand or let.

(v) Rental Income as Trading Income

3.21 As the major distinction between trading and property income now lay in relevance for

pension contributions, this issue appeared less important than tackling the matter by achieving

a unified tax treatment for composite businesses to overcome the problems with allocating

common overheads and the inflexibilities limiting sideways loss relief.

(vi) SDLT

3.22 This is potentially the significant taxation question for the tenant, rather than the

landlord. The separate discussions in Wales about abolition for agricultural tenancies under

the prospective LTT were noted.

3.23 The first meeting was initially minded to see TRIG’s 2012 proposals as potentially a

more realistic solution, treating all tenancies of more than two years as for seven years.

(vii) Graduated and Capped Income Tax Relief on Rents

3.24 This is the model that has been adopted in Ireland with substantial increases in the relief

made from New Year 2015. At the time of the Group’s first meeting, there was little official

data but the Irish Revenue’s figures for 2015 were then released in early August. However,

even before that, it was understood that the outcome of the extension of Income Tax relief for

farmland rents in the Republic of Ireland was a major and positive effect on lettings of farmland

that should be considered in more detail. The information available on the background,

analysis, measures and results was reported in the Chairman’s briefing paper to the Group. The

meeting received a skeleton of a proposal with points for consideration:

- a relief from Income Tax, not Corporation Tax

- available for lettings of agricultural land. The definition here needs to be able to cover

the position in all four territories so cannot be based on specific tenancy statutes; the

definition of agricultural property for Inheritance Tax might be most apt. It is assumed

that the UK might include farm dwellings and farm buildings but exclude property in

non-agricultural uses. It would include the agricultural property element of a business

letting.

- to tenants who are not connected to the owner as this is the most obvious area for

artificial outcomes (family transition might rather require an alternative tool to be

considered as part of succession policy)

- starting at 5 years - above the median and the mean length of FBT for England and

Wales, would exclude any SLDT in Scotland except for those let for exactly 5 years

(and so otherwise for a minimum of 10 years there under LDT or MLDT lettings), be

consistent with Northern Irish aspirations and the extent to which they too are

influenced by the Republic’s rules.

- increasing with the length of the tenancy, perhaps most sharply at 15 years. With

interaction for England and Wales at 7 years with SDLT compliance and registration,

it might be considered whether a separate rate at 7 years helped or hindered.

- for new tenancies (the aim again being to influence future decisions)

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- that means that the position for a surrender and regrant of a pre-existing tenancy needs

to be considered. While the new tenancy could only qualify if it met the other

conditions proposed (including length of term), it would by definition be to the same

tenant. Would that achieve anything policy terms where 1986 and 1991 Act tenancies

were concerned? In the same vein, should it only be available for other pre-existing

tenancies where the new term is longer than the previous outstanding term and

otherwise qualifies?

- should it apply to new tenancies from year to year that are secure under the 1986 and

1991 Acts? Doing so would be a stimulus to encourage successions and maintain

neutrality between forms of letting. If it is to apply to successions under the 1986 Act

(where done as a new tenancy), provision should be made for Scottish successions

(effectively handled by assignment of a continuing tenancy)

3.25 This was seen as a basis for further work.

3.26 It was questioned whether:

- the 5 year starting point was too short but that was driven by the circumstances in

Northern Ireland (unless that could be a province-based feature).

- it should more directly encompass land let for environmental uses. While the main

object was agricultural productivity, environmental productivity was also a concern.

3.27 It was seen that this could, in conjunction with the new Residential Nil Rate Band

Amount once fully phased in, be seen as offering a retirement package, of interest to many but

not all, with:

- land being rented out achieving a secure income from rent

- the house no longer needing to be a farmhouse with the uncertainties of APR.

The qualifications for RNRBA needed to be considered in each case.

(viii) Rollover Relief from CGT

3.28 The mainstream form of rollover relief did not allow relief on reinvestment in let land

or land intended to be let. Amending the list of qualifying assets to allow this (Business Assets

Taper Relief had been similarly extended) would create neutrality here.

3.29 This is possible for the special form of rollover relief available under the shadow of

compulsory purchase (though that does not allow for reinvestment in constructing new

buildings).

(ix) Investment Allowances

3.30 The general point was that landlord and tenant would usually make better investment

decisions in their circumstances where supported by tax reliefs than by grants.

3.31 Agricultural Buildings Allowances should be revived and made available to landlords

as a support for private investment in the future infrastructure of the sector.

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3.32 Enhanced Capital Allowances (ECAs) – the potential for these to be used once

outside EU state aid rules should be reviewed. There are problems with the present list over

such matters as rainwater harvesting.

4. Next Steps

The concepts identified by the first meeting for further work and consideration in terms of

productivity in the sequence of discussion in the meeting were:

1. Unified taxation of composite businesses

2. Using APR to encourage longer lettings and within that

a. What might modelling show as an expected outcome?

b. Might relief be graduated?

3. Reviewing TRIG’s SDLT proposals of 2012

4. A capped Income Tax relief on new letting of farm land, graduated by the term of the

letting with its capacity to form part of retirement package

5. Extending the qualifying assets for rollover relief to let land and land intended for

letting.

6. Use of investment allowances, including reviving Agricultural Buildings Allowances

and the options for Enhanced Capital Allowances once outside EU state aid rules

5. Conclusions and Recommendations

5.1 The second meeting of the Working Group continued the general discussions of the

first meeting, reviewed the modelling of the TFA’s APR proposals and moved to conclusions

and recommendations to TRIG.

5.2 Income Tax Relief on Rental Income from Farmland

5.2.1 At its second meeting, the Group had to hand the newly released data from the Irish

Revenue for 2015, the first year of the substantially increased reliefs for private owners letting

land. These showed in that first year alone following the Budget in October 2014 an increase

of a third in the number of landlords under the scheme, a substantial response when land

management decisions are usually made slowly and take time to implement.

5.2.2 The Group endorsed the concept and proposed that it be available as a relief from

Income Tax at the basic rate for new lettings with ceilings of:

- £7,500 (the same as for Rent-a-Room relief) for land let for 5 years or more

- £15,000 for land let for 10 years or more

on the model as outlined above for lettings to unconnected parties.

The TFA has since advised that it would only support this measure “where the income tax

benefits where coupled with restrictions to the availability of APR in line with the TFA's

position on that” (i.e. agricultural tenancies let for ten years or more or for specialist cropping).

5.2.3 Productivity - In conjunction with the more secure alternative to APR on the

farmhouse offered by the new Residential Nil Rate Band Amount for houses passed down the

family, this could offer many farmers an attractive retirement package and see land move into

new hands.

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5.2.4 This appears to be a potent way to encourage land to move into the let sector and

towards the trained so positively identified by the Irish study.

5.3 Recognising Composite Trades as a Single Business for Income Tax

5.3.1 With the analysis offered in the general discussion above, the Group endorsed this

approach for businesses with shared overheads, including property income as well as multiple

trades – so removing a barrier to letting

5.3.2 The TFA has since advised (and asked that it be noted as its view) that it would only

support the extension to property income in respect of agricultural tenancies let for ten years

or more (or for specialist cropping).

5.3.3 Productivity – This would simplify the tax affairs of businesses with multiple trades,

removing problems for diversification, including letting.

5.4 Capital Allowances

5.4.1 With new investment as one critical factor for farming to achieve improved

productivity, the Group agreed several recommendations:

- the ability to carry forward unused parts of the Annual Investment Allowance

- a 100 per cent allowance for those investing in the new digital, optical and other

emerging technologies for farming

- an allowance for association with larger research and development projects (noting that

the 230 per cent allowance for this is only available to companies under Corporation

Tax and not to sole traders and partnerships).

- a review and expansion of Enhanced Capital Allowances for environmentally beneficial

technology, resolving the problems currently found with the list based approach

- restoration of the agricultural building allowance

- a recognition of off-farm investment, as for storage.

5.4.2 Productivity – Investment is seen as essential to improving productivity. Tax

allowances offer a good way to attract private money making private choices about the best

way for a business to go forward.

5.5 Capital Gains Tax

5.5.1 Rollover Relief – The Group agreed to recommend that reinvestment of receipts be

allowed into capital improvement on let farmland under both the main form of rollover relief

and that under the shadow of compulsory purchase. This would directly support investment in

the productivity of let land and it absence is proving a particular problem with current

compulsory purchase schemes such as HS2.

5.5.2 It also discussed the extension of the list of qualifying assets for the main form of

rollover relief to include let farm land occupied for purposes of husbandry, so removing a

ground of discrimination against investing in let land. The Group was, however, cautious about

how such a breach of the focus of the main form of rollover relief on in-hand business assets

would be viewed, albeit this would follow the principle of fiscal neutrality between forms of

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farm occupation, and so prejudice the recommendation for reinvestment into the improvement

of let farm land. The TFA has since indicated that it would not support this extension.

5.5.3 Entrepreneurs’ Relief – The disqualification for this relief where the business had at

least 20 per cent of investment activity (so including let farm land) was noted.

5.5.4 This was a problem area for tenant being paid to surrender a tenancy but who has not

fully withdrawn from faming at that time. He could not then qualify for this relief.

5.6 SDLT

The Group concluded, after further discussion that, while there was merit in the 2012 proposals

by TRIG, simplicity and the wish to remove a bar to longer lettings led it to recommend that

all tenancies of agricultural property be exempt from SDLT.

5.7 VAT

5.7.1 Noting that the EU rules framing VAT would no longer restrict the United Kingdom

after Brexit, the Group’s second meeting agreed that the ceiling for the de minimis exception

for partial exemption should be looked at.

5.7.2 Partial exemption is a complex area of VAT for single businesses that provide both

VAT-able and exempt outputs. In the context of a land business, the letting of land and

buildings is normally exempt but an owner can “opt to tax” (waive the exemption) and then

charge VAT and so recover it on input costs, such as repairs. However, that does not apply to

dwellings which remain exempt, with VAT on repairs not recoverable. For a let farm subject

to the option to tax, the rent is then allocated between the exempt dwellings (no VAT) and the

other property (with VAT).

5.7.3 Partial exemption then sees a series of calculations under which all VAT on inputs can

be recovered if the irrecoverable part is less than £7,500 a year, a figure that has stood still

since the 1970s, so catching more and more people in this area.

5.7.4 The Group propose that that ceiling be raised substantially once this can be done after

Brexit.

5.7.5 This is an area raised by the Office of Tax Simplification in its review on simplifying

VAT issued this spring.

5.8 Excluding APR for Land Let for Less than 10 Years

5.8.1 The Group does not recommend that this be adopted.

5.8.2 Reviewing the modelling prompted by the first meeting (see Annexe) pointed to the

outcome of such a change largely lying in the hands of those currently letting for between 2

and 7 years:

- no argument was put that the change would attract land into the let sector and as some

land would always be lost for other uses or private reasons, the sector would then tend

to shrink.

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- it was assumed that a significant proportion of those already letting for between 7 and

10 years would move to 10 years though some would have reasons for not having

chosen 10 years and so might shift to shorter terms or out of letting.

5.8.3 The issue thus turns on what fraction of the private owners already letting for between

2 and 7 years would:

- move to 10 years

- not change their present policy

- let but for shorter terms to retain flexibility while letting

- withdraw from letting altogether.

5.8.4 On the ground, those outcomes would be the result of individual decisions in individual

circumstances but, reviewed overall, they play out the tension for private owners between their

desires:

- to achieve the tax relief by moving to 10 years

- to retain flexibility and a sense of control by adopting the other three options (and, if

not letting, still having full APR and BPR).

5.8.5 In summary:

- the TFA suggest that more than half of these current landlords letting for between 2 and

7 years would move to 10 years. The modelling suggests that assumption could see a

strong polarisation as it implies that APR is the dominant motive:

o 26 per cent of lettings and 35 per cent of let land moving to longer terms

o 33 per cent of lettings and 25 per cent of land leave the let sector.

- all others suspect that the desire for flexibility, especially if such policy changes are

being made in this area, would see few do that and more leave the let sector. The

modelling for that suggests that could see 6 per cent of lettings and 9 per cent of let land

move to longer terms, all others letting short or withdrawing.

5.8.6 Productivity – The TFA argues that a more secure (if smaller) let sector would offer

improved management and investment to support productivity on those longer lettings,

presenting the relief as a reward for landlords doing the “right thing”.

5.8.7 All other members of the Working Group are seriously concerned that the erosion of

flexible terms offered by owners and sought by many tenants for an industry that will need to

be very adaptive in its use of land in responding to the coming challenges. The loss of such

flexibility would tend to reduce opportunities for potential entrants and the less established.

Were such a change made, that fact would be seen as a suggesting a larger policy uncertainty

about policy leading owners to be more cautious.

5.8.8 With those arguments and while the TFA continues to advocate the measure, it is not

supported by the Group. Other Group members see it as acting counter to the interests of the

sector.

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6. A Final Point – Converted AHA Tenancies and APR

6.1 While not discussed in the Tax Working Group, a final point has been put to me by the

AHA Working Group which unanimously agreed that land subject to an AHA tenancy that had

been converted to a fixed term market rent tenancy under its proposal Item 9 should qualify for

the same 100 per cent rate of APR on agricultural value as applies to land with new post-1995

tenancies (including FBTs and succession AHA tenancies).

6.2 That extension in 1995 was a very powerful support for the tenancy reform with its

signal to the private owners that are the most likely source of new land to let. Equally, there

was no point in rewarding earlier decisions already made on the facts at that time.

6.3 The conversion proposal would be a considerable innovation which some landlords

may see as challenging. While seeing a move to a market rent, there would be cases where it

may be a longer tenancy, albeit for a more certain period and without succession. Many may

be challenged by its opportunity for one assignment of the lease, albeit that would be an

opportunity to change the occupation of the land and ease retirement.

6.4 Allowing that such a conversion then qualifies the land for the same full rate of APR

on it agricultural value, as if it were farmed in hand, let on a FBT or post-1995 succession AHA

would follow the much appreciated and longstanding principle of fiscal neutrality between

ways to occupy farmland. Those are choices that should be made on business grounds, not tax

grounds. In doing that, it would support landlord confidence in the new mechanism that is

proposed to unlock better, more productive and more profitable farming.

--0---0---0--

ANNEXE 1

A VIEW OF PRODUCTIVITY

(A Note Put to the First Meeting of the Working Party)

The policy aim is to enable and support a continuing and sustained improvement in the

productivity of agriculture with consequent benefits for the rural economy and the wider food

sector.

Productivity is understood not to be simply yield measured by gross output, but is rather the

most efficient use of resources to produce the outputs that the market will buy.

Although there have been modest gains in resource efficiency, the picture is one of general and

sustained stagnation in productivity growth in the UK for over two decades. With the prospect

of more open international markets, the UK’s position as a high cost producer in both absolute

and relative terms, perhaps especially in some of the meat-producing sectors, poses a major

issue that could drive significant change. The object of policy should be to manage and master

that change positively for the long term health of the sector and the rural economy.

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Assuming that output can be produced in forms and at values that the market wishes to buy,

the requirements for improving productivity are seen to be:

- skills

- investment

- confidence

- removing barriers to change and innovation

- removing barriers to markets.

With the discussion of farm structures and length of tenancies, there seems no empirical link

between security of land occupation (once beyond the seasonal agreements) and farming

productivity. It is, for example, not obvious that tenancies with security under the 1986 Act

offer more productivity than land farmed on a 5 year farm business tenancy. Analysis of this

will be confused by the multiple factors at work. Previous studies have suggested some

advantage to mixed tenure farmers but that could easily be because better farmers become

mixed tenure ones, as growing tenants may buy some additional land as well as rent it and

owners may see rental opportunities to expand. It may also reflect a more progressive

temperament. These observations, of mixed tenure as a badge of progression not a cause of it,

point to the potential for new tenancies, also the result of contemporary choices, to be more

likely to be held by better farmers.

It is suggested that the key factor on which to focus is who is farming rather than the structures

used. In that it appears that the critical issue turns on training and education more than age.

Work in the Irish Republic by Indecon for the 2014 Agri-Taxation Review found that:

- a trained farmer had on average a 12 per cent higher output than an untrained one

- farmers over 65 typically had output that was between 4 and 7 per cent lower than

farmers under 65.

- there was an additional €1.76m of agricultural output for every €1m of retirement relief

in agriculture (which requires the disposal of assets rather than necessarily retirement).

Those figures will be subject to the usual problems of such assessments. It may be that a

younger family member is really doing the management and work on an older relative’s farm.

Simple issues of physical capacity as much as more dynamic associations between age and

farm size may be relevant to this. Nonetheless, they point in the reasonable direction that

having land farmed by trained people, who may often be younger, is likely to see better

management. The Review’s conclusion was direct:

“The potential for Irish agriculture will in Indecon’s judgment only be unlocked if

progressive farmers with ambition have access to agricultural land.”

Current demographics point to a further issue. So far as the reported age of a farmer indicates

the age of the effective person in the business (and at least for one-man businesses without

major use of contractors it might usually be), increasing longevity now makes it more likely

that a successor on death may be in their sixties. This is perhaps more material than the often

quoted average age which can mask more complex patterns of who may really take decisions,

perhaps especially those relevant to productivity, such as timeliness.

15

Purely as an illustrative exercise, with a gross UK output of around £20 billion before subsidies,

an uplift of 4 per cent (allowing for the many trained people in UK farming) would add £800

million. If, as seems reasonable to assume, that would very largely passed through to Total

Income from Farming (TIFF) it would be a significant uplift on a figure that, excluding

subsidies, has been of the order of £1 to 2 billion.

While the Indecon study is reported in terms of production rather than productivity, it seems

intuitively reasonable that that same transfer of farming to trained people would see at least no

less an improvement in productivity and quite possibly a greater benefit.

16

ANNEXE 2

MODELLING BY THE CAAV

FOR THE EXCLUSION OF APR FROM LETTINGS UNDER 10 YEARS

September 2017

1. A First Modelling?

1.1 Figures for England and Wales from the CAAV’s Annual Land Occupation Survey

2016 are now used in an initial attempt to offer indicative orders of magnitude for the outcome

of these effects.

1.2 In doing this, no reason is seen for such a change to lead to any noticeable move of land

into the let sector. That mean the analysis is about moves within the current let sector and the

potential loss of land from it. These effects could include:

- land let for 10 years and more being re-let for such terms, whether or not influenced by

these or other changes

- land let for shorter term being le-let for terms of at least 10 years, to secure the benefit

of this and other possible changes

- land let for short term being let for unchanged or perhaps shorter terms, whether

because of case-specific reasons or the more general desire to preserver flexibility while

still letting

- land currently let not being re-let, in order to protect flexibility, secure the alternative

benefits of BPR and avoid perceived uncertainty about the regulation of the let sector

and the taxation system.

In this, only private individuals are directly influenced by the way IHT works and that may

vary over their live and by circumstances; other owners, such as charities, are unaffected.

1.3 Scotland is not considered at this point with the current trajectory for its let sector, its

larger uncertainties and issues, though the inability to let there for terms of between 5 and 10

years may make the issue less relevant. Landowners there are already making larger choice

over whether to let and, if so, for what length.

1.4 A 10 year threshold might be too long to have much traction in Northern Ireland in its

current position here the aspiration for longer terms is expressed in term of 5 years.

2. What Land Might Move to 10 Year Terms?

The first indicative assessment is of the extent to which land might move to 10 years lettings:

- a breakdown of terms by type of ownership has not been given but County Councils

and the small number of financial institutions, neither affected by APR, let for average

terms of 7 years (Table 6.12).

- along with traditional institutions, private owners let for an average of about four and a

quarter years (Table 6.12).

- private owners provide 82 per cent of bare land lettings, 72 per cent of holdings with

land buildings and 74 per cent of fully equipped lettings with a dwelling (using figures

from Table 6.5). Where letting is a lesser part of their activity, BPR may anyway give

them the relief they want but that effect is ignored in this rough analysis.

- while that could suggest that the Survey’s overall figures might be used as an

approximation for the effect on private owners for whom Inheritance Tax will generally

17

be relevant, the data for Tables 6.9 and 6.10 of the 2016 Survey have been reworked to

give figures for just private landowners and these are used in the following points.

- 6.1 per cent of FBTs were already let for more than 10 years (7.8 per cent overall in

Table 6.9). Such a change in APR could be expected to confirm those decision but give

the landlord no new benefit, though it would be relevant to later decisions.

- 5.1 per cent were let for periods over 7 years and up to 10 years (4.8 per cent overall).

This is, perhaps, the segment most likely to be persuaded to let for longer by the tax

change where privately owned though some will have had reasons for not rising to a 10

year term. The proposed legislative changes might often also have weight here.

- below that, 4.9 per cent were let for periods above 5 years to 7 years (5.8 per cent

overall). The proposed legislative changes might also have some weight here but these

are owners whose present choices are further from 10 years, possibly for reasons that

would not alter. As well as reasons specific to each case, this might commonly reflect

the larger desire to retain flexibility over an important asset.

- 18.7 per cent let for terms of between 3 and 5 years, with 5 per cent of the land

- 14 per cent let for terms of between 2 and 3 years, with 10 per cent of the land

- 51 per cent let for 2 years or less accounting for 29 per cent of land let by private owners.

3. Model 1

3.1 Taking that in the round, perhaps 10 per cent of FBT lettings by private owners (so

about 8 per cent of all FBT lettings) offer the most likely segment of current lettings to adopt

a 10 year term with private owners susceptible to the influence of APR. These are those

currently letting for terms of between 5 and 10 years. Looking at that segment of the market:

- as lettings for longer terms than the average tend to be larger holdings, some 19 per

cent of the area let in 2016 was let for periods from above 5 years to 10 years (21 per

cent overall in Table 6.10).

- if three quarters of that land were persuaded to move to 10 year lettings, perhaps a very

strong conversion rate but one that then allows for some movement also from still

shorter lettings, that could be 6 per cent of lettings and about 15 per cent of the area

currently let in a year on FBTs. Higher conversion rates might not be readily plausible

once allowance is made for the range of individual circumstances and some land being

lost to other uses; lower conversion rates are possible.

3.2 On the assumption that, as in 1995, the change would only apply to new lettings or was

with sufficient forward notice, that movement could, over time, amount to perhaps 3 per cent

of the agricultural area of England, essentially within the let sector and predominantly from

existing lettings of between 5 and 10 years. On those assumptions, that shift might be expected

to occur over some seven or so years from its introduction.

3.3 The influence of any change might be particularly strong on land that where an AHA

ends, as the data show that not only is there is a strong conversion rate to FBTs (86 per cent in

2016 and no recent year less than 62 per cent) but the average length of terms for the following

FBT is longer (10.26 years in 2016, with no recent year showing less than 6 years).

3.4 If the change was with immediate effect for all lettings, then there would be an incentive

for a spate of activity with the surrender of current FBTs and the termination of tenancies

continuing after their expiry with the regrant for holdings that might be switched to 10 year

lettings. It is assumed that there would also then need to be a provision deeming lettings under

the 1986 and 1991 Acts to be for more than 10 years (one might anyway be needed for

successions even were this limited to new lettings).

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3.5 What Might be the Opposite Effect? - Land might though also be lost from the let

sector to other arrangements or offered on shortened terms to retain flexibility of control. This

outcome is harder to judge and will in part depend on the larger climate and circumstances at

the time. The following comments can be offered:

- the segment of the market most vulnerable to a move to shorter terms might be that let

for terms between 2 and 7 years, some 37 per cent of lettings by private owners (also

37 per cent overall) and some 47 per cent of land let in 2016 (44 per cent overall; Tables

6.9 and 6.10)

- it might be the lettings for less than 5 years that would be most likely to find other

answers – some 82 per cent of lettings by private owners for whom Inheritance Tax and

APR is relevant (71 per cent overall) and 64 per cent of the area let by private owners

on FBTs (60 per cent overall).

- nonetheless, for a fraction of these may be in situations where either IHT is not seen as

immediately relevant or where, on advice, BPR anyway offers an answer. These would

have no reason to change their policy until those judgments changed.

- it would take the diversion of under a quarter of those lettings below 5 years into other

arrangements or in-hand farming to move as much land – 15 per cent of the area let on

FBTs in 2016 - out of letting as may make the step up within the let sector to 10 year

terms.

If that were the outcome, that withdrawal from letting would arguably be a more fundamental

move for the structure of agriculture than a lengthening of some tenancies, albeit affecting

equivalent areas of land though involving more lettings (18 per cent rather than 6 per cent).

3.6 With the shorter length of these tenancies and the ability to terminate tenancies

continuing after expiry, this loss of land from the formal let sector seems likely to become

apparent more quickly than the move to 10 year lettings.

3.7 Alternative Outcomes – Having offered a framework for analysis with a structure of

argument as to who might be encouraged by such a change to let for more than 10 years, who

might still choose to let for shorter terms and who might withdraw from letting, this can be

used to develop alternative analyses.

3.8 In this, it is stressed that the assumption above that three quarters of the land currently

let for between 5 and 10 years could move to term of 10 year and more is already a strong one.

4. Model 2 – A Greater Shift t Longer Lettings

4.1 A stronger assumption still would be more than half of all lettings (say 60 per cent)

between 2 and 7 years to convert to 10 years lettings and so at least 80 per cent of those over 7

years do the same. Those assumptions, assuming a strong response to policy changes, would

result in:

- a move of 4 per cent of all owners with 6.4 per cent of land from lettings of over 7 years

to lettings of 10 years and more

- a move of 22.2 per cent of owners with 28.2 per cent of land form letting of between 2

and 7 years to 10 years and more.

In combination that would see some 26 per cent of lettings and 35 per cent of land move to the

longer term, a large shift.

4.2 However, that seems likely to be accompanied by a polarisation of choices with others

deterred by this option which could be seen as either attractive or repellent. Perhaps half of the

19

remainder and also those letting for shorter terms, whose desire for flexibility is only balanced

by specific circumstances and patterns of seasonal letting, might withdraw from lettings. That

would see some 33 per cent of owners and 25 per cent of land leave the let sector.

5. Model 3 5.1 More moderate assumptions, reflecting the desire by private owners for flexibility and

their caution about public policy, could see a move to 10 years by:

- 40 per cent of those letting for more than 7 years, noting that they have already chosen

not to let for that longer period.

- 20 per cent of those between 5 and 7 years

- 10 per cent of those between 2 and 5 years.

In combination, that might see 6 per cent of owners and 9 per cent of land move to 10 year

lettings.

5.2 Counterbalancing that would be two moves:

- longer lettings, such as those for 7 years, moving to shorter terms

- a fraction of all lettings moving away from letting altogether.

That could particularly see a larger loss of that land currently let for between 5 and 10 years

than under the previous model’s assumptions.

6. Summary

6.1 The three models sketched here for discussion all show some land moving within the

let sector to 10 year terms:

- Model 1 sees 6 per cent of lettings with 15 per cent of land do this

- Model 2 could see 6 per cent of letting and 35 per cent of land do this

- Model 3 see 6 per cent of owners and 9 per cent of land do this.

6.2 Each model though also sees movement to shorter terms and out of the let sector by

other owners. This is easiest to assess with Model 2 which would see 33 per cent of owners

and 25 per cent of land leave the let sector while longer lettings that do not move to 10 years

might shorten significantly.

6.3 The larger issue for productivity is the balance between:

- the gains thought to arise from encouraging a fraction of lettings to move to longer

terms

- the loss of flexibility and opportunities for entry and expansion by the loss of land from

lettings and the shortening of other terms.

A further tension in that is that the gains in security seem likely to accrue mostly to existing

farmers than to facilitate change.

7. Review

7.1 The analysis above suggests that the key to judging the probable outcome lies in judging

the motives and reactions of those private individuals who currently let for terms of between 2

and 7 years, accounting for almost half the agricultural land let in 2016.

7.2 The proponents of the FBT 10+ package would argue that the place of APR in the minds

of private owners and their advisers is such that it would overcome other concerns, reinforced

by any other changes made to support longer lettings. It does not though seem to be suggested

that such a restriction of APR would encourage anyone not currently letting to let.

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7.3 There will always be some loss of land already let for 10 years as circumstances change

or land goes for development and other uses. There is also, as illustrated by Scotland, the risk

that a climate of policy uncertainty could deter such lettings from being repeated but, at this

stage, that is discounted in this analysis. However, the point still stands that, if no new land is

coming into the sector, it will shrink by failing to replace natural losses.

7.4 APR is the relief that supports the investment activity by private individuals that can

aid entry and progression, rather than farmer diverting capital into expansion by acquisition.

The FBT 10+ proposal would see unlet land have the same APR status as land let for 10 years

but a better status than land let for terms such as 2, 3 or 5 years. It would also, subject to

circumstances, have access to BPR. If the let sector is not refreshed by new land, the natural

losses to sale, development, afforestation and other uses will inevitably see its size fall.

7.5 More generally, discussion suggests that, for many private owners, the retention of

flexibility of control over their land is fundamental, even if it is a flexibility that may never be

used. Larger ownerships, estates and institutions can more easily take a longer, larger view but

smaller scale ownerships can be the more concerned about locking themselves into an

inflexible position with the risk of exposure to policy changes. They accordingly tend to prefer

a succession of shorter lettings or allowing a shorter letting to run on from year to year.

7.6 The outcome turns on judging the overall balance between those two motives:

flexibility or access to one of the available Inheritance Tax reliefs. As this proposal is not

intended to be about increasing the size of the let sector but about altering its structure, the

question can be expressed as asking what proportion of land or lettings lost to the sector would

be seen to balance the gain said to be given by other lettings moving to longer terms?

7.7 The conversations to date suggest that the instincts of private owners would tend to be

more driven by the desire to retain flexibility so that, at most, only a small fraction of that land

would convert to 10 year lettings, so more like Model 3 and placing the emphasis on the

probable overall risks to the let sector. That choice may vary with the age of the owner.

7.8 If the result is a significant loss of land, the examples of both the situation before 1995

and, more recently, in Scotland illustrate the cumulative effect where such losses are sustained

year on year, leaving a smaller let sector on longer terms, generally from institutions and estates

with a policy of letting, rather than other private owners. Economic change and new

opportunities might then be more focussed outside the formal let sector.

7.8 In conclusion, such a change to APR, while potentially assisting some within the core

of the let sector, does not seem to assist the answers needed for farming to respond to the

challenges foreseen