TFA Blog #04 – The New Chancellor of The Exchequer Must Use Fiscal Levers to Improve Farm Tenancy Security

This blog is the full (unedited) piece, written by George Dunn, TFA Chief Executive, for The Cumberland News and Westmorland Gazette, published on 28 February 2020.

Rishi Sunak will have been both surprised and delighted to find himself as the new occupant of 11 Downing Street.  As he steps over the threshold of his new home and office, he will need to surmount a pile of correspondence aimed in his direction including a letter sent by me on behalf of the TFA.

With a budget planned for March 11, Mr Sunak will be pedalling hard to get up to speed with his new brief.  The TFA has taken the opportunity to propose changes in the taxation environment within which rural landlords make decisions about letting land to encourage longer term Farm Business Tenancies (FBTs).

It has been nearly a quarter of a century since the introduction of the Agricultural Tenancies Act 1995 which ushered in FBTs.  The legislation represented a major deregulation of the agricultural let sector and at the time there were great hopes that it would produce an increase in opportunity both for new entrants and those looking to develop existing businesses.  Indeed, the stated objectives of the 1995 Act were to improve the efficiency of land use within the agricultural sector whilst increasing opportunities for both progressing farmers and new entrants.  Neither of these objectives have been attained.  Whilst we saw an increase in the amount of let land through the early years of the new legislation this has, by and large, tailed off.  However, the biggest failing of the legislation has been the perpetuation of short lengths of term leading to inefficiency in both environmental and farm business management.

Given that farming is a long-term endeavour requiring significant capital investment, patience, good soil management and the ability to balance profitable years against the bad, there is a legitimate question about why lengths of term are so short.  The answer is with much higher demand for land than supply, landlords can offer short terms for high rents at very little risk whilst, at the same, time receiving generous and unconstrained tax benefits.  This is a clear demonstration of market failure since those offering opportunities have the power to dictate their terms to an unreasonable extent causing inefficient outcomes.   In response to this market failure Government has a responsibility to intervene and it is through manipulation of the taxation system where such intervention would have the biggest, positive impact.

Short term tenancies are holding back progression, investment and sustainable land use.  Farm Business Tenancies have been too short for too long and now is the time for that to change.  The TFA believes that average lengths of term on FBTs should be 10 years or more and that the Government should be using fiscal levers to encourage a more sustainable position.

I am hopeful that the new Chancellor will be encouraged by his new Cabinet colleague at DEFRA, George Eustice who said in a recent letter to the TFA:

“Moving on to address your concerns about the length of farm tenancy agreements, the Government recognises that farming is a long-term business and I am interested in exploring ways in which we can encourage more landlords to consider longer term tenancies whilst retaining the flexibility that Farm Business Tenancies currently provide  …….   I also recognise that the fiscal framework plays an important part in landowner decision-making.  Rest assured we will continue to engage with Her Majesty’s Treasury about such matters to share information and feedback views from farming stakeholders on this issue.”

So, what might the Chancellor be able to do?  Here are four suggestions:

  • Restricting the generous, 100% Agricultural Property Relief from Inheritance Tax currently available to all landlords regardless of the length of time for which they are prepared to let land. It should only be available to those prepared to let for 10 years or more, or on new tenancies including successions with security of tenure under the Agricultural Holdings Act 1986.
  • Offering landlords prepared to let land for 10 years or more the ability to declare their income as if it was trading income for taxation purposes.
  • 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, in practice, they take no risk in the business, have little, if any, entrepreneurial input and lack any management control.
  • Reforming Stamp Duty Land Tax to end the discrimination against longer tenancies.

Landlords can continue to let land for short terms if they want, but they shouldn’t be rewarded by the taxation system for doing so when what we need is a significant ramping up of security of tenure.  The taxation changes identified above would provide the incentive required to nudge landlords to do the right thing.  Virtually single-handedly, Income tax incentives to landlords in Ireland have produced a vibrant let sector almost from nothing.  With the Government consistently calling upon the agricultural industry to enhance its resilience, focus on environmental outcomes and improve productivity, the new Chancellor has the opportunity of assisting in making these goals a reality.

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