UK budget has ups and downs for farmland investors

Stamp duty land tax for higher taxpayers has gone up, but capital gains tax has gone down, making exits for some more palatable.

George Osborne’s decision to create a sugar tax in the latest UK budget caught headlines. But what about the budget’s implications for UK farmland investors?

Following last week’s budget, larger farm purchases in the UK are now being taxed at a higher rate, with stamp duty land tax (SDLT) moving from 4 percent last year to 5 percent on larger commercial agricultural properties. However, lower rates of capital gains tax (CGT) mean some investors will find it cheaper to exit UK farmland.

SDLT on commercial, non-residential and mixed-use land or properties is now taxed at a 2 percent tax on the amount paid for a property above an initial untaxed £150,000, and 5 percent on anything above £250,000. CGT for higher rate taxpayers has fallen from 28 percent to 18 percent.

“In terms of UK farmland, probably the biggest and most obvious difference is the increase in SDLT,” Ian Monks, head of rural at Bidwells, told Agri Investor. “On larger transactions it is effectively an increase of 1 percent. So on a $10 million investment it’s another £100,000 that has to be found. And if residential property is involved, that increase can be even greater; SDLT on additional residential properties has  gone up by 3 percent.

“There were a few transactions that forward to before midnight the day before the budget to take advantage of lower SDLT rates, although not many saw it coming,” said Monks.

He added that the rise had not stopped any deals to buy property going through, as far as he was aware, but that some farmer buyers are having to borrow more money to complete purchases they had arranged before the budget.

“There is also some confusion about how to apply SDLT if a property has a mix of residential and farmland,” he said. “We are waiting for clarification, but for now you would have to divide up the land and do calculations for each, submitting that to Her Majesty’s Revenue & Customs.”

“We welcome the continuation of entrepreneur’s relief which allows farmers who wish to exit to sell and to pay a lower rate of capital gains tax of 10 percent,” said Monks. Entrepreneur’s relief applies to sole traders and shareholders in an unlisted trading company, meaning own-and-operate investors could qualify. Buy-to-let investors on higher value properties pay the new 18 percent rate on CGT.

“That and the reduction in CGT free up what is otherwise a constrained land market within the UK,” said Monks.

Similarly, investors who trade on the land using a corporate vehicle will benefit from a reduction in local corporation taxes down to 17 percent.

Monks said that while some of these changes could have an effect on the UK’s farmland market, with the reduction in local corporation tax and CGT making the UK an attractive country to invest in, Brexit is still at the top of investors’ minds.

“In farming uncertainty is also making investors nervous,” he said.“As example today, I was talking to an overseas investor who said they were going to wait and see a bit, given the possibility of Brexit.

“It is the fear of the unknown which is causing some investors in particular to move at a slower pace than they might have done previously. If we do exit, then we are likely to have reduced support in the long term for farming in the UK, and it could make us uncompetitive, but we don’t know if that will be the case.”