Call to restrict inheritance tax agriculture relief to exclude short leases

8 Feb 2021

A Conservative peer has suggested reforms to legislation and taxation relating to rural landlords and the letting of land. Opening a debate which lasted just over an hour, Baroness Rock said the tenanted sector of agriculture is adversely affected by short-term thinking, but the Tenant Farmers Association (TFA) has put forward tax changes to address this, and the Government should look at these.

TFA suggests restricting the 100 per cent relief from IHT, currently available to all landlords regardless of the length of time they are prepared to let land, only to those prepared to let land for 10 years or more, said Rock. TFA also recommends restricting those landowners that use share farming, contract farming, share partnerships and grazing licences as ‘thin facades’ of trading activity to gain tax advantage when in practice ‘they take no risk, have no entrepreneurial input and lack any management control’. And TFA calls for offering landlords who are prepared to let for 10 years or more the ability to declare their income as if it were trading income for taxation purposes. Finally, TFA advocate reforming SDLT to end the discrimination against longer tenancies. Rock finds it odd that government policy is to encourage longer farm business tenancies on the one hand and then to penalise those long-term tenancies through the way that they are taxed through SDLT.

The landlord-tenant system in agriculture favours the landlord, argued Rock. Short lengths of agreement, restrictive tenancy terms and high rents provide maximum benefit and flexibility to landlords and place additional burdens on existing and prospective tenants, she said. With more individuals looking for opportunities to take on tenancies in comparison to those offering land, there is a market failure, which the Government needs to correct, both by considering sensible changes to legislation and the beneficial taxation environment within which landlords operate. Financial incentives are driving perverse behaviours that are in direct conflict with the good intentions of current legislation, she concluded. Lord Carrington, crossbencher, said that, with the huge number of uncertainties facing farming now that the Agriculture Act has been passed, the timing is not right for further legislation. The introduction of the Environmental Land Management Scheme (ELMS) may have adverse tax consequences, as current tax rules operate as a disincentive to diversification in how they treat investment and trading activities differently.

Lord Cameron of Dillington, another crossbencher, said that to encourage more lettings, HMRC needs to recognise the concept of the rural business unit, whereby you can have different enterprises operating on a holding but treated as one business for the purposes of tax. One of those permitted enterprises should be long-term agricultural tenancies. If that were to happen, long-term tenancies would flourish. Incidentally, agricultural tenancies themselves should be able to include a variety of enterprises, especially and including ELMS, he said. The Earl of Devon, also a crossbencher, urged caution against a rush to further immediate reform and suggested that we need time to understand ELMS and farmers’ new role as environmental land managers before enacting further change.

Lord Greaves, Lib Dem, said that short-term tenancies are holding back progression, investment and sustainable land use, which are exactly what will be needed in abundance if the ELMS is going to succeed. If a lot of that income comes in future from government grants and environmental schemes, the relationship between landlords, tenants and the grants will be crucial. Baroness Scott of Needham Market, Lib Dem, said the Agricultural Tenancies Act 1995 has not achieved what it set out to do to improve the land; nor has it brought in a new generation of farmers.

The Parliamentary Under-Secretary of State, Department for Environment, Food and Rural Affairs, Lord Gardiner of Kimble, closed the debate. Lord Gardiner said a variety of land tenure and the ability to rent land flexibly is important, because it enables tenants and owners to expand, responding to market changes by renting out additional parcels of land. It also provides a route into farming for new entrants, bringing new skills and ideas into the sector.

On taxation, he recognised that the fiscal framework plays an essential role in owners’ decisions whether to let land and on the length of tenancy terms offered. But he thought that other factors are important too, such as the size, quality and location of the land and personal motivations for owning it. He said the impact and potential unintended consequences of tax reform need careful analysis; for example, the proposal to limit the availability of agricultural property relief to owners who let land for 10 years or longer could result in owners instead using other ways—for instance, contract farming or taking the land back in hand—to retain the benefits of that relief. The minister said he is aware of the work that Tenancy Reform Industry Group has done to investigate tax issues, suggesting that tax changes might help to incentivise the letting of agricultural land and encourage longer-term tenancies, for example, through limited income tax relief on farmland rents. He is talking with the Treasury about wider tax reform. But further legislation would not be straightforward because the pressure on primary legislation at the moment across Whitehall is intense, he warned.

The full debate on 21 January 2021 is here.

By Hamant Verma