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Is Farmland A Sound Investment?
http://www.ft.com/cms/s/0/2f160f5e-ce9f-11e2-8e16-00144feab7de.html#ixzz2hyPlkVqB By Lucy Warwick-Ching Cow©Robert Thompson I inherited a substantial amount of money recently and have always dreamed of owning some land in the country. Everything I read seems to tell me that farmland is a sound investment, but are there any additional tax benefits to be gained by investing in it? Andrew Arnott, partner in the landed estates and rural business group at wealth management group Saffrey Champness says farmland indeed continues to be a steady investment. The latest Royal Institution of Chartered Surveyors (Rics) survey revealed that UK farmland now costs an average of £7,440 an acre, compared with £2,400 an acre in 2004. Rising values aside, the tax benefits available are another incentive. However, it is not as easy to claim these benefits as it once was – HM Revenue & Customs (HMRC) wants to ensure that such benefits are only available to those actively farming the land, rather than to those aspiring to a farming lifestyle or seeking the benefits of a large house in a rural location. Such tax benefits include exemptions from inheritance tax (IHT) and capital gains tax (CGT) under certain circumstances, the ability to offset any losses from the farm against profits made elsewhere, and benefits by way of value added tax (VAT). IHT relief is available where the land has been farmed in person for at least two years, or where the land has been let to a tenant who has farmed it for seven years. Depending on the type of tenancy, IHT relief can be available at either 50 per cent or 100 per cent of the value of the land concerned. Where you qualify for 100 per cent relief, then assets such as land and buildings can be passed on to heirs free of any IHT liability, either during lifetime or upon death. There are specific stipulations covering cottages, their use and occupation, for them to qualify for exemption. There have been a number of prominent cases with regard to farmhouses and IHT, but a general rule is that the house must be “of a character appropriate”, and “proportionate” in size in relation to the area of the land. If it does not pass these tests then it is highly likely to fail should it be tested by the courts. HMRC has shown its enthusiasm to contest on a number of occasions – with varying degrees of success. Equestrian interests are not usually regarded as farming, and land or buildings to keep horses do not qualify for the same exemptions. With woodland, generally the trees will be exempt from IHT but the land not, although there may be the opportunity to claim business property relief (BPR) for it. While farmland is generally liable for CGT on disposal, there are reliefs available if disposed of as a business asset. For example, “hold-over relief” may be relevant where the farm is being passed on to the next generation, or “entrepreneur’s relief” if it is being sold to a third party. Rollover relief should also be available where farmland assets are disposed of and the proceeds invested in further farmland or buildings. Send your questions to: money@ft.com Forum Farmers are generally able to recover all the VAT they incur on business purchases and expenses, and farmland often offers useful security against bank lending. Add all that together and it certainly has a lot in its favour – although equally, it is definitely not an option for everyone. Continue reading
When Should You Use BPR To Plan For IHT?
By Tony Mudd on Monday, 7 October 2013 Business property relief isn’t the right tool for everyone planning their inheritance but it’s well worth a look to see whether you might benefit from it. It has occurred to me that anyone who read my previous article Beware Government Bearing Gifts may have been left with the view that investing in businesses that qualify for Business Property Relief (BPR) brings with it such inherent liquidity and investment risks as to make it an area to be avoided. To use an old and often quoted adage that it would be akin to letting the tax tail wag the investment dog. If this was indeed the case then it would only be appropriate to outline the counter arguments; specifically the value BPR qualifying investments outside of an Individual Savings Account (ISA) wrapper can have. It is the case that Alternative Investment Market (AIM) shares qualifying for BPR offer a narrower range of investment options than the wider BPR investments available outside of an ISA wrapper and by definition lower diversification and higher investment risk. However I am going to look here at the tax benefits and the type of investors or situations where this type of investment may be of particular relevance to make my point. To remind readers, investments qualifying for BPR provide the simple but straightforward benefit of being exempt from Inheritance Tax (IHT) once they have been held for two years provided they remain in the hands of the investor at the point they become chargeable ie lifetime gift into trust or on death. Elderly investors or those in poor health Many IHT solutions either require investors to survive a period of seven years or rely on them being able to arrange life assurance. For elderly investors or clients in poor health the fact that the planning involving BPR is effective within two years and/or does not require medicals can be of significant value. Attorneys and deputies Where an investor loses mental capacity their financial affairs will either be dealt with by an attorney or deputy. In these circumstances due to the limitations imposed in relation to lifetime gifts (with the possible exception of Continuing Powers of Attorney in Scotland), the ability for the attorney to invest in the individual’s own hands in a BPR qualifying investment may be the only inheritance tax planning option available. Existing trusts Where the existence of trust assets will trigger a liability to IHT the selection of BPR assets as a trust investment can provide significant tax planning benefits. A liability to IHT could arise in respect of Interest in Possession Trusts or Immediate Post Death Interest Trusts on the death of a beneficiary or in respect of Discretionary Trusts for periodic (10 yearly) charges. Business owners Many investors who also run their own business will be well aware that the business itself offers the perfect shelter from IHT. The reason for this is that the business, assuming it is a trading entity, will qualify for BPR. However if and when the business is ultimately sold the protection from IHT will be lost. Through the use of BPR investments not only does this not need to be the case but the normal two year qualification will also not apply. BPR investments can also be used by husband and wife or those in civil partnerships where only one party needs to survive the two years that the investment is held and in combination with appropriately drafted wills whereby in some circumstances the tax advantages can be doubled. As with AIM shares qualifying for BPR in ISAs BPR investments outside of an ISA wrapper is not a panacea but for some clients in the right circumstances, well worth a look. Continue reading
How Bad Will The Financial Pinch Be In 2014?
Stu Ellis, FarmGate blog | October 16, 2013 Corn Harvest Corn and soybean yields this fall are about as good as the 2012 yields were bad. Despite the challenging weather that delayed planting and then later put corn and soybeans in moisture stress, many fields are recording exceptional yields. Although two successive years should not be chosen to either determine a trend or calculate an average, the 2012 and 2013 crops are certainly representative of the long term averages. But what will happen when the other shoe drops? If 2014 returns to an average yield, farmers could be hurting financially, particularly if they agree to higher cash rents in the coming weeks. We are in the annual farm leasing season and many landowners are going to want to see more revenue to reflect the higher value of their farmland. Farm operators who agree to that may have difficulty making the necessary cash rent payments based on expected prices and trend yields for 2014. One only has to look at futures prices at the CME’s Board of Trade to pencil out revenue. With the 2013 production of 14 billion bushels of corn, it is easy to see that the spring guarantee for crop insurance on the 2014 crop will be about $4.50 per bushel. And although we are 6 months away from planting the 2014 crop, the market is only willing to pay about $4.80 per bushel for the crop produced next year. That will go up or down, depending on the level of production, but that has to be considered a median price given the expected 2 billion bushel surplus left from the 2013 crop. It is easy to see the $7 and $8 corn prices from the 2012 drought are history. But even if a drought crop occurred in 2014, the 2013 surplus will not allow prices to climb very high. In fact, University of Illinois agricultural economist Gary Schnitkey says a 125 bushel yield next year will not even generate a $400 per acre return to the operator and land, even with a $6 harvest price and a $200 crop insurance payment. According to his calculations, even a high yield crop of 220 bushels per acre will still not return more than $300 per acre to the operator and land. His numbers are based on a $537 per acre cost for inputs, such as seed, fertilizer, chemicals, and fuel; everything but cash rent. And his concerns for the profitability of farmers for the 2013 and 2014 crops are focused on the rate of cash rent that farmers accept. With a return to land and operator, ranging from $275 to $391 depending on yield, there is not much left for the operator’s family living cost after cash rent is paid. And in many cases, there will be insufficient crop revenue in 2014 to cover cash rents in the $350 to $450 range. As farmers begin to pencil out budgets for 2014, one of the priorities will be what they can afford to pay for cash rent. While the Schnitkey numbers suggest that cash rents should decline if farmers want to remain in the black that may not be what the majority plans to do. Doane Agricultural Services of St. Louis recently surveyed farm operators and found 48 percent have agreed to 2014 cash rents higher than what they paid in 2013. Only 14 percent reported that rents declined. The balance of 38 percent saw rent stability, despite owner desires to raise the rent in the coming year. When competition for farmland fuels the fire in one’s belly, the result could be a serious case of financial indigestion. Summary: Farm profitability in the coming year could be challenged with low returns to operator and land, in the wake of low commodity prices, regardless of yield. Whether yields are exceptional or drought reduced farm revenue may not be able to meet current cash rent obligations, and much less any increased rent for the 2014 crop year. Source: FarmGate blog Continue reading
