Another cloud on the horizon

05 April 2017

As we move into a new financial year it is perhaps a good time to consider the financial state of the agricultural industry in the UK. “Fragile” is a good word to start the assessment. Commodity prices have picked up somewhat over the last six months, but much of this is simply a currency movement following the Brexit vote and even so there is still relatively little margin when wheat stands at under £140 for harvest. We know that Basic Payment represents a very substantial proportion of the profit on many farms, and even with commodities at their current price this will continue to be so. In some recent years the subsidy has represented almost the whole of the profit and this could well become the case again if prices fall or even as inflationary pressures work through the system.

We also have the massive uncertainty following the Brexit vote and subsequent triggering of article 50. We have assurances that subsidies will continue until the end of the current CAP round, but there are no real guarantees beyond that, other than assertions that there will still be support, but that it will be very much directed at environmental issues rather than a flat rate subsidy.

The saving grace in all this has been that financial providers tend to regard agriculture as being a safe haven and therefore it has enjoyed something of a “protected status” on the bankers’ risk spectrum. Why is this?

Profitability bears virtually no relationship to the value of the underlying assets if one includes the underlying land in the calculation. If the ratio of rental income to land value is expressed as a percentage, it is almost negligible in comparison to the return on commercial or residential property – or indeed on quoted securities. However, and despite the fact that “past performance is no guarantee of future results”, investment in land have proved to be very sound over the last 30-40 years, and banks like a good track record.

But how far is this track record due to the availability of Inheritance Tax (IHT) reliefs? Certainly the conventional advice from accountants to their clients is that it makes sense to stay “in harness” as long as possible from a tax perspective (and this is often the sort of advice which clients like to hear). There is currently a clear advantage in retaining working farmer status or keeping let land on a Farm Business Tenancy at the date of death so as to secure both IHT relief and Capital Gains Tax (CGT) uplift.

From this simple fiscal analysis there will be support for the land price since there are good reasons for elderly farmers not to sell but plenty of neighbours looking to buy. The market is further distorted by outside investors who see it as an attractive home for funds which may have come from the sale of another business, and who can both retain a favourable tax status and perhaps also enjoy a rather easier lifestyle in their semi-retirement/new career.

There are signs that this protected status may be under threat. Certainly, the publicity which has been attracted by the large scale investment in the Eastern Counties recently has not gone unnoticed within the Treasury (and also by some journalists). Then, shortly before Christmas, consultants were instructed by HMRC to contact certain professional firms and carry out a fact finding exercise with a view to establishing how well the tax reliefs are understood by landowners, how valuable they are and what role they play in tax planning. This news should send a shiver up the spines of tax planners and landowners alike. If there is to be a significant attack on these reliefs (and the political climate is probably one where such an attack could be contemplated) the knock on effect for the industry could be catastrophic. Outside investors might dry up; if the relief is retrospective we might see disinvestment with a corresponding flood of land onto the market, leading a price collapse. Some commentators might welcome this (and a government might see it as justification), pointing to it seeing  creating a reduction in fixed prices for farmers as rents fall and interest charges plummet, but the other side to this scenario is that financial institutions might take a very different view on the creditworthiness of agricultural enterprises, leading to higher interest rates for businesses who have seen the value of their security diminish and potentially more forced sales into a tumbling market – and at a time when the industry is in very fragile position anyway.

What can one do about this? Certainly, the next few months might be a very good time to think about succession planning, and passing the farm over whilst it is still very possible to do so. We know from previous surveys that succession is a major issue for a very substantial proportion of the farming community and a relatively benign IHT regime had meant that action has often been shelved in the knowledge that 100% relief will sort it out at the end of the day. We have not always had 100% relief and there is no guarantee that we will always have it in the future – so dusting off the IHT plans and sorting something out soon would not be the worst use of a wet day.

This article originally apeared on Moore and Smalley, MHA Member firm, website.