Farmland and, to a lesser extent, agricultural buildings such as barns can prove attractive investments. Ian Cowie investigates the opportunities and pitfalls associated with buying farmland.

An upward trend in agricultural land values is already well established. This is partly because – as Mark Twain observed – they aren’t making it any more, and partly because bigger populations mean more mouths to feed. Ian Bailey of Savills Research sums it up: “In the UK, the investment performance of farmland and forestry has outperformed all other assets over the past 10 years.” David Hebditch at rival estate agents Chesterton Humberts agrees: “Over the last decade the agricultural sector has flourished in a way it never did before and farmland values have hit an all-time high. We predict they will increase further by an average of six per cent per annum during the next five years.”

Sceptics may scorn such speculation as a man trying to talk up his own book. But even experts with a vested interest in haggling prices down have noticed the growing interest in farmland and agricultural buildings. Ed Sugden, from independent buying agents Property Vision, says: “We have never seen so many agricultural investors who are viewing farmland as a safe asset in these volatile times. East Anglia remains most popular, because it has some of the highest-yielding land. Investors should avoid buying small fields, stock farms and steep rolling country, which is hard to farm. However, there are people who like to enjoy the amenity value of their land by having woods and a commercial, or family, shoot.”

A pretty barn, in the middle of rolling greenery, is a long-standing favourite with British buyers, but Sugden urges caution. “Barns are generally in isolated positions without mature gardens and trees. They are also fairly nonconformist in terms of their layout, often with bedrooms on the ground floor or up in the eaves. There may also be a lack of light due to planning restrictions. Barns tend to be like Marmite; you either like them or you don’t.”

Generous tax breaks are more likely to appeal to people planning for retirement and, eventually, to pass assets to younger generations. There are important tax advantages relevant to retirement planning, such as freedom from inheritance tax (IHT) and capital gains tax (CGT). But you do need to be careful about potential pitfalls. Sean McCann of the National Farmers’ Union (NFU) Mutual, explains: “One of the key benefits to investing in farmland is a potential exemption from IHT via Agricultural Property Relief. If you want your land to qualify for relief, you must have either owned it and farmed it yourself for at least two years. Or, if you’ve owned it for at least seven years, during which time it has been farmed by someone else. Many have come unstuck when trying to claim tax relief on farmhouses. Some buildings will qualify, but the rules are complex.”

For example, HM Revenue & Customs will not usually accept that land or buildings used to keep horses can be regarded as agriculture for the purposes of IHT or CGT exemption. That may seem harsh and illogical to equine enthusiasts, but the purpose is to deter people from claiming tax relief to defray the cost of their hobby. Similarly, tax inspectors will resist attempts to shelter farmhouses or other buildings from tax. Particularly where there is little or no current connection between them and agricultural activities on the surrounding land.

Given these complexities, it is vital to seek advice from an accountant before investing in agricultural land, buildings or forestry. Studying closing costs estimates from BG Home Solutions or other companies is of benefit, too. Richard Mannion, a director of accountants Smith & Williamson, points out: “The tax treatment of woodlands and agricultural property have similarities, but they are different. Woodlands – that is, the trees – are exempt from CGT and IHT. However, the land itself is not exempt, although it may be possible to claim 100pc business property relief for IHT. If business property relief is available, then any CGT liabilities can be held-over on a lifetime gift.”

Ordinary mortals may begin to feel their heads spinning as accountants and inspectors seek to separate the wood from the trees – and then tax both differently. But filling in forms is an important part of farming today and investors in this type of property need to keep on the right side of the rules.

Source : Telegraph