Budget 2014: Rural points

19 March, 2014

Nothing very obvious grabs the rural headlines in today’s budget other than the extension of CGT rollover relief to the new Basic Farm Payments.  This measure is backdated to 20 December 2013, the date the new payment entitlements were introduced.

The single most significant measure for most rural businesses will be the increase and extension of the Annual Investment Allowance.  Currently £250,000 a year this was due to revert to its former rate of £25,000 after December.  In a very welcome extension it is to be increased to £500,000 almost immediately (from April), and to be extended to 31 December 2015.  Complications which arise from straddling account year ends aside, this is most welcome for any farmer with serious investment plans in the next year or two.  The government reckons this will ‘cost’ £85 million in 2014-15 rising to £1,270 million in 2016/17.  However there will be a benefit to government from 2017-18 of £445 million over two years as annual writing down allowances are proportionately reduced.

The property world will also be interested in the extension of the special taxes which now apply to dwellings owned by ‘non-natural persons’ – generally meaning valuable London property held by companies, latterly to avoid SDLT on sales and transfers.  The threshold for 15% SDLT is reduced to £500,000 from £2 million immediately – although there are savings for those unfortunates who have exchanged contracts but not yet completed.  The threshold for ‘ATED’ – Annual Tax on Enveloped Dwellings – will also start to fall from 2015, to £1 million in the first year incurring an annual ATED charge of £7,000 and the following year to £500,000, leading to an annual ATED charge of £3,500.

Environmentalists will want to study the changes to the Carbon Price Floor.  The Carbon Price Support rate has been reduced to £18/tonne through to 2020.  It had been planned to raise it to £30 per tonne in 2009 prices by then.  However the EU Energy Trading Scheme has not worked well, and continuation at the current floor rate was seen as a threat to the competitiveness of the electricity generating industry.  This should take some pressure off electricity bills in the next few years (although marginally so in most cases).

Other more detailed points which may be relevant in the rural economy and to property include:

  • Personal allowances for Income Tax go up to £10,000 this year, and £10,500 next year;
  • A Social Investment Tax Relief is introduced this April.  This will provide Income Tax and CGT Reliefs, with Income Tax Relief of up to 30% of the investment.  Details are to follow, but this might be relevant to the various social enterprises which work in the countryside;
  • Mineral extraction allowances for Income Tax purposes will now include the cost of a successful planning application (previously these were regarded as part of the cost of acquisition so the effect is to accelerate tax relief on the expenditure);
  • Enhanced Capital Allowances in Enterprise Zones (100% allowances) are extended until 31 March 2020;
  • Business Premises Renovation Allowance has been clarified, with time limits of 36 months for carrying out the work in some instances;
  • The Seed Enterprise Investment Scheme is to be made permanent, including the associated CGT Reinvestment Relief;
  • Landfill Tax rises in line with RPI, as does Climate Change Levy and Vehicle Excise Duty.  However, the fuel duty rise planned for September has been cancelled;
  • A ‘rolling’ age limit of 40 years for classic vehicle exemption from Vehicle Excise Duty takes effect in 2015 – handy for the rural poor who have to keep ancient cars on the road.  The classic car business is said to be worth £4 billion a year and to employ 28,000 people;
  • The Threshold for compulsory VAT registration rises to £81,000 from £79,000.  This is also therefore the threshold for simplified three line tax accounting for smaller businesses, and from April businesses within this threshold will be able to account for tax on the cash rather than the accruals basis.  Detailed points, but given the preponderance of very small businesses in the countryside these are all worth a look;
  • At the other end of the rural scale, more is promised on trusts.  Watch out for Nil Rate Band splitting where a settlor has created more than one trust, and some changes to simplify their Income Tax treatment.  These are likely to arrive in the Finance Act 2015;
  • Employee benefits and expenses may also see their treatment changed next year;
  • Sticking with rural self-employment, Class 2 weekly National Insurance payments may in future be collected with the annual tax return;
  • VAT on prompt payment discounts is also to be brought in line with EU requirements.  The current treatment is that VAT is charged on the discounted price whether the discount is taken or not.  In future, VAT will be levied on the actual consideration paid;
  • Whether the exemption of satellites from Insurance Premium Tax will lead to lower prices for rural web surfers who access the internet by satellite remains to be seen …
  • An interesting extension to an IHT exemption will see the estates of emergency personnel who die in the line of duty, or whose death is hastened by injuries incurred in the line of duty, exempted from IHT.  This is in line with the treatment of armed services personnel, but won’t take effect until 2015.  This seems a very laudable measure – but what of others who die in the line of duty, or perhaps performing individual acts of heroism on nothing other than humanitarian grounds?
  • Another area worth scrutiny for those considering charitable land trusts as a means to protect a rural estate is the proposal to remove tax benefits from charities established for tax avoidance.  Details are sparse, but there are several important estates who will need to follow this one closely;
  • Managing partners of professional firms will also want to look at the proposals to introduce PAYE on salaried partners, and some of the anti-avoidance proposals where partnerships are a mix of individuals and companies (including ‘personal’ companies).  Meanwhile it looks as if partners (and anybody else) who works beyond the age of 75 will in future be able to continue to claim tax relief on their pension contributions;
  • The headlines over the next few days will be dominated by the pension changes.  Given the greater freedom of pensioners to use their pension funds how they wish once they have secured a (lower) annual guaranteed income of £12,000 it will be interesting to see what impact this has in the property market.  A rush to invest in buy-to-let perhaps?
  • And finally some good news for the traditional rural boozer: beer down a penny and spirits frozen.  His sophisticated counterpart is however going to be paying 6p more for a bottle of wine.

As ever, few headlines; lots of detail; a few opportunities and a few more pitfalls.


The Privatisation of Biodiversity

28 February, 2014

Professor Colin Reid and Dr Walters Nsoh presented the conclusions of their research programme at the University of Dundee on 20 February 2014. Their research has focussed on the legal implications of the development of new ‘markets’ in natural capital. The emphasis tended to focus on biodiversity offsetting and payments for ecosystem services. Law Commissioner Prof Elizabeth Cooke provided an extremely helpful update on progress with the introduction of conservation covenants in England and Wales. The Parliamentary Draftsman is working on draft legislation following the Law Commission’s review last year so we are likely to see a new type of land covenant in the next two years or so. These covenants will be distinct because they will be able to bind future as well as current owners to positive works, and they will not require the ownership of adjacent land which benefits from the covenant.

From a practical point of view the presentations from Dr Tom Tew on the work of the Environment Bank, Mary Christie on the Carse of Stirling Area project and Dr Andy Tharme on his work on biodiversity offsetting for wind turbines with Scottish Borders Council all gave very helpful insights, ‘from the ground up’.

I was asked to provide a ‘practising professional perspective’. The key points that would concern a professional adviser seemed to me to start with the client’s objectives (in this case let’s say a landowner). Objectives can be many and varied but for a private landowner, revenue and capital enhancement as well as long-term asset protection are normally high on the list. Succession, continuation and inheritance planning are also normally vital considerations. It can take some time to clarify objectives, but it is invariably time well spent. Advisers are keen to ‘add value’ for a client – it’s the best justification for a fee note after all!

My second fundamental point is that land management rarely if ever starts with a blank sheet. Land may be occupied by tenants, sporting rights and mineral rights may be held separately, farming policy will always be important. Other schemes may already be in place, for example Higher Level Stewardship, Entry Level or older schemes (even forestry dedication covenants). The policy and regulatory environment for land rarely stands still for long either. Currently we are coping with the transition from Single Farm to Basic Farm Payments, wondering what the latest decisions on CAP (Common Agricultural Policy) modulation will mean in practice for the new Rural Development programme and contending with the implications for this year’s IACS (Integrated Administration and Control System) returns. In the medium to longer term there may also be supply contracts to consider (e.g. will that 1,000 tonnes of wheat we have sold forward for September 2014 actually materialise if the weather doesn’t get any better?) as well as questions of continuation and succession.

Water is also rising on the agenda (forgive the pun). The current floods highlight one aspect but mere availability of water in sufficient quantity and quality is also likely to become a key consideration in the near future. With a Water Bill being debated by the House of Lords, while Defra is simultaneously consulting on water abstraction rights and trading there could be much to challenge the farmer who is highly dependent on reliable water supplies for his cropping policy.

So in looking at the potential for the privatisation of biodiversity, my client will need to think carefully about the knock-on effects on agricultural productivity, animal health and welfare, tenants and other rights holders. The potential impact on other diversification opportunities will also be important – will the latest thinking help or hinder?

Asset values and return on capital will also be one of the uppermost considerations. For example few rural estates earn a revenue return of any more than 2% a year. In this situation,Agricultural Property Relief and Business Property Relief from Inheritance Tax become an obsessive worry. Failure to qualify will mean that upwards of 20 years’ profits will be needed to pay the bill. If a landowner signs up to one of the new initiatives will he still count as a ‘farmer’ for these purposes? An error here could be very costly indeed – and with rapidly growing farmland and forestry prices the cost is only likely to climb steeply.

How secure will payments for schemes like PES (Payments for ecosystem services) and biodiversity offsetting be? Will participation lead to the danger of a subsequent designation because, for example, we have inadvertently created a SSSI (Site of Special Scientific Interest). This concern can be exacerbated by the mishmash of schemes which are now used to achieve these outcomes. For example Water Level Management Plans in the Somerset Levels work to a timescale of 100 years, whereas the main mechanism for their implementation is Higher Level Stewardship and the like with timescales of no more than 10 years.

So what makes the ‘privatisation of biodiversity’ good for my client? It needs to be a good fit with long and short term plans for farming, tenure, succession and security of income, a solid business opportunity not just another scheme. The practical schemes highlighted at the conference gave some good ideas of how this can be done. We are undoubtedly standing at the dawn of a new paradigm in land management – but we need to work with the grain of traditional land management and stewardship if we are to make the most of it.

Professor Reid’s research was sponsored by the Arts and Humanities Research Council.  More details of the project can be seen here.


Cooperative Group to exit farming – look out for cheaper land?

26 February, 2014

Cooperative Group has announced that it is planning to withdraw from its farming business.  The precise wording of the announcement is interesting because it does not say that the Coop is going to sell its farms.  What it does say is, “The Co-operative Group has decided that its Farms are non-core and has started a process that is expected to lead to a sale of the business”.  On the face of it this could mean a simple sell-off of the farms.  But dig a little deeper and it might mean something else.  A contract farming arrangement with one of the bigger farming companies perhaps?  A series of tenancies or other joint ventures?  Management buy outs?

However the catalyst for this move has been the disastrous losses built up by the Cooperative Bank, standing at £2 billion plus according to the BBC’s Robert Peston.  So it seems likely that the need for cash must be an attractive part of the sale.

According to the same BBC report the Coop farms 17,200 hectares (42,500 acres), mainly growing cereals and fruit.  Only 2% of its produce goes to its retail stores, and Coop Farms got out of milking many years ago.  Despite today’s announcement the Coop Farms website is still advertising the agricultural apprentice scheme for which it was lauded last autumn.

So what might all this land be worth?  Average GB land prices last year were £8,500 according to Savills so that might put it at £361.25 million.  A handy sum but not very much against a £2 billion loss.  But would the Coop’s land achieve these values?  On the one hand most of it is far better than ‘average’ land but on the other hand it tends to be the smaller blocks which command the higher prices per acre.

Much comment on the agricultural land market recently has commented on the shortage of supply against strong demand.  Viewing this in a simplistic way, Savills also reported that 144,000 acres of farmland was marketed publicly last year, probably representing about 70% of all land sold last year.  Say therefore that 200,000 acres of land changed hands last year for an average price of £8,500/acre.  The total value of the market was therefore in the order of £1.7 billion.

Now suppose that the Coop land had been added to the market last year, taking the availability up to 242,500 acres but still being chased by £1.7 billion – that brings average prices down to £7,000 per acre, and a mere £297.5 million for the Coop to set against its £2 billion deficit.

Of course the economics of land prices are not quite as simple as this, but the point remains that a simple sell-off over a short period would add considerably to the availability of agricultural land in a market where high prices have been characterised by limited supply.  So taken together, perhaps this all means that the Coop will indeed need to look at more imaginative options than a simple sell-off – opportunities for a new entrant anyone?  And just think of the transitional problems as we enter a new CAP regime …….

 


Woodland Complexities

25 February, 2014

The latest Rural Briefing from RICS addresses the challenging area of woodland taxation and valuation.  A lot can go wrong as the examples we presented at yesterday’s South East Rural Update Conference demonstrated.  One wood worth £70,000 but potentially five different Inheritance Tax bills ranging from nil to £28,000.  Capital Gains Tax was little better with potential bills on disposal ranging from less than £5,000 to more than £11,000.

A link to the briefing paper and an introduction to it can be found here.

These slides summarise the paper.  David Lewis and I presented them at the RICS South East Rural Update on 24 February 2014.

Two further observations emerged during the conference discussion. Ensuring that woodlands can be recognised as a business asset may help to tip the balance in a ‘Balfour’ appraisal of a rural estate, helping to ensure that the majority of estate activity can be recognised for Business Property Relief from Inheritance Tax. This would not only save potentially high IHT bills on woodland assets themselves, but also on other estate assets which might otherwise be unrelievable. Another follow-up question concerned the production of biomass for ‘own use’. This could indeed be a grey area, but one approach may be to ensure that the value of the timber sales is clearly accounted for in estate and woodland records.

 


Who wants what this time?

16 February, 2014

Systemic Solutions at the landscape-water interface was the title of a workshop held at Bristol Aquarium on Monday 10 February 2014, and I was asked to speak about the landowner’s perspective.

Who want what this time? was my opening question.  When dealing with anything in relation to rural land it’s vital to realise that you are rarely starting with a blank sheet.  Are you dealing with the Somerset Levels or the Cambridge Fens, Exmoor or the Peak District, or something in between?  Some of the items that may already be listed on that far-from-blank sheet include:

  • Are there tenants, and if so on what terms?  Traditional agricultural lettings with very long term security of tenure and considerable freedom for the tenant, or newer farm business tenancies of shorter duration?
  • Alongside tenants, are the sporting rights actively used?  By the owner or by sporting tenants?
  • Are the minerals owned separately?
  • What is the farming policy on farmland?  How will a ‘systemic solution’ seek to influence this?
  • Is the land already dedicated to other schemes, for example Environmentally Sensitive Areas, Higher Level Stewardship, Entry Level Stewardship, Forestry Dedication covenants, ‘Open Country’, Access or other management agreements?
  • How is the transition from CAP Single Farm Payment to Basic Farm Payment going to affect the land, and how will this interact with a systemic solution?
  • Will there be implications for the IACS return to the RPA, and how will eligibility for new Pillar 2 schemes be affected?
  • In the longer term, how will this affect plans for continuation, succession and inheritance?
  • What about supply contracts – for example grain may have already been sold for delivery next September or later?

Plenty to think about already, so is water even on my ‘worry list’   It most certainly is:

  • We are suffering from either having too much water or too little;
  • Is it worth investing in longer-term storage for the resilience of the farm or estate business?
  • The Water Bill due to become law later this year may offer new opportunities to sell or buy water for commercial users and suppliers;
  • Meanwhile the water abstraction consultation currently under way from Defra looks as if it will have considerable implications for trading in abstraction rights, and for the management of water abstraction rights.  Does this mean it may be more difficult to get irrigation water when it is most needed – underlining the point already made about the economics of investing in longer term water storage;
  • Waste water management and disposal if always of concern on livestock farms.

For the farmer in particular, what are likely to be the knock-on effects of being part of a systemic solution?

  • Will this involve interference with land drainage and what will this mean for agricultural productivity and animal welfare?
  • Who else needs to be involved or who will this affect?  Tenants?  Landlords? Graziers? Mortgagees?  Trustees of land in trust?
  • How will this affect other diversification opportunities, in particular renewable energy?
  • Will there be a knock-on effect on other development opportunities?
  • How will it affect asset values and return on capital with rural estates showing revenue returns of no more than 2% on asset value?
  • Will it affect eligibility for Agricultural Property Relief from Inheritance Tax, or Business Property Relief?  If either of these is compromised the consequence could be a 40% IHT bill on an asset earning only 2% or so a year – so the diversion of 20 years’ profits to pay the tax bill off, just in time for the next IHT bill.
  • Will I still be classified as a ‘farmer’ for tax and other purposes?
  • Will this interference lead to further designations, for example SSSI designation and what will the effect of this be?
  • How secure will any payments be?  Or will this be the usual mish-mash of using a shorter-term scheme (e.g. HLS) to achieve longer term goals (e.g. Water Level Management Plans with a 100 year timescale)?

Systemic solutions for landowners, farmers and land managers need to be an excellent fit with long-term farm or estate business plans, inheritance and succession as well as short term requirements like farming, tenure and the need for a secure income.  In short they should offer a solid business opportunity rather than another short-term ‘scheme’.

The workshop was the first of a pair, with the second due in May or June in the form of a field visit in Gloucestershire.  It was organised under the auspices of the Environmental Sustainability Knowledge Transfer Network, by the University of West of England, the Royal Agricultural University and with support from the Landbridge Network.

Web Classes 2014: online rural CPD in valuation, taxation, new water laws, ag tenancies and rural development

3 February, 2014

Interest in our RICS Rural Webclasses continues to grow, and we have had some great feedback on the classes we ran in 2013.  These are proving to be an effective, efficient, economical and popular way to keep up to date, for practising chartered surveyors and others involved in farm and estate management too.

Booking details of the first two classes for 2014 are now available online:

We are starting with another look at farm and estate valuations: purposes, methods and sources.  This class runs on 28 February and you can see more details and book a place here.  This will revisit some of the basics of a rural asset valuation, look at some recent developments and of course, place this all in the context of the latest 2014 amendments to the RICS Red Book – now called the RICS Valuation Professional Standards.

We build on the first class on 18 March with a look at investment valuations of freehold and leasehold interests in farmland.  Again this class will be ‘new Red Book proofed’, and will look at the particular challenges of valuing a confusing range of freehold interests and lease types.  Whether you need to brush up on the right YP to use, or update yourself with the latest valuation thinking in this area, this class will guide you safely through.  More details and booking: here

What does it cost? £35 + VAT for each 90 minute class if you sign up individually.  For this you get the class itself, copies of presentation materials and access to a recording of the class afterwards in case you want to revisit any important nuggets.

Better still, why not sign up for a season ticket?  For £150 + VAT you can take part in any 10 classes on any topic across the full RICS Training Portfolio.  But in particular look out for the following rural classes scheduled for later in 2014:

  • 9 April: Farm rental valuations in England and Wales
  • 28 May: Forestry and Woodland Taxation and related valuations (featuring the new briefing paper to be launched this spring)
  • 6 June: Renewables valuations
  • 24 June: Water Act 2014 – practice and valuation implications
  • 9 July: Key points for the new or aspiring partner or director in a surveying firm
  • 18 September: Agricultural Tenancies in England and Wales part 1
  • 26 September: Agricultural Tenancies in England and Wales part 2
  • Date to follow: Rural development in the National Planning Policy Framework

A season ticket for the 10 classes listed here would reduce the cost per class to just £15 + VAT per class, or £10 per hour of solid, interactive, focussed rural CPD.  And with no need to leave your desk there is no expensive travel time or cost either.  Watch out for other rural topics too, as we add to the list.  If you can’t see your topic covered here, then let me know and we’ll see what we can do.  Happy Learning in 2014!


Prospects for agricultural markets and income in the EU 2013 – 2023

18 January, 2014

Agricultural income growth will have to rely on restructuring in the next 10 years, rather than growth in commodity prices. This is a key conclusion from the European Commission Report, Prospects for Agricultural Markets and Income in the EU 2013-2023, issued this week.

At farm level, what does this mean for UK farmers?  ‘Firm’ commodity prices are predicted.  This is at least a positive outlook compared with the prospect of falling prices, but it doesn’t offer much prospect for income growth on the farm.  As ever, farmers will continue to be at the mercy of market and natural forces.

But the report does say that ‘restructuring’ will offer opportunities for income growth.  This means yet another long hard look at labour inputs (already well stretched on many farms), continuing attention to detailed management and inputs in order to achieve higher net margins.  There is still a big gap between the best and the rest in farm incomes.  Although the farmers who make up the top 10% every year tends to be a floating population there is nevertheless a great deal that many farmers can do to close this gap.  Fertiliser and fuel inputs also need careful attention given their relationship to the price of crude oil.

If ‘restructuring’ points to the need for new kit, the next year or so may be the best time to buy with capital allowances for Income Tax set at very generous levels until January 2015.

The agricultural economic outlook also means that farmers must continue to look at other options for their assets.  Will the next 10 years see the real emergence of opportunities to profit from natural capital, by getting involved in carbon storage, water management, biodiversity offsetting or any of the other opportunities which are starting to open up in this area?

Key factors identified in the EC report include:

  • Commodity prices stay firm given low productivity growth, growing markets for biofuels and overall global food demand;
  • In the arable sector, biofuels will be the subject of the most dynamic demand factors.  By 2020 biofuel is expected to make up 8.5% of liquid transport fuel, with yield growth expected of 0.6% on average;
  • The maize and wheat area is therefore expected to grow;
  • Isoglucose is expected increasingly to take the place of sugar in processed foods – although no mention is made of the obesity crisis also in the news this week;
  • 2013 saw the lowest meat consumption for eleven years in the EU, at 64.7 kg/head.  It’s expected to be up to 66.1kg by 2023;
  • Beef production is expected to drop, while pigment production is expected to rise from 2014 onwards (but from low levels given the impact of recent welfare reforms);
  • Dairy expansion is expected to be restrained by environmental factors, with prices expected to stay firm but not spectacular;
  • The agricultural workforce is expected to shrink, and to see a widening income gap.

Key risk factors identified in the report include:

  • The success or otherwise of the African Green Revolution;
  • Higher prices for compound feeds;
  • Crude oil prices;
  • Euro/dollar exchange rate;
  • The possibility of a sudden drop in growth coupled with currency depreciation for a major exporting country like Brazil

This highlights a few key indicators that farm businesses should watch carefully.

I was asked yesterday whether farmers should take reports like this seriously.  Not to the extent of reading all 130 plus pages, but the headlines do point to some key issues which are worth following in the next 10 years.

For other coverage of the report, see:

http://www.fwi.co.uk/articles/17/01/2014/142865/eu-forecasts-10-years-of-firm-prices-for-farmers.htm [Farmers Weekly, accessed 18 January 2014]

http://www.euractiv.com/cap/farm-produce-prices-remain-stabl-news-532759 %5BEuropean News website, accessed 17 January 2014]

http://www.globalmeatnews.com/Industry-Markets/EU-economist-predicts-fall-in-meat-consumption [Global meat news, accessed 17 January 2014]


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