Farm Landlords and Tenants - The Tax Issues

There are various tax issues that arise in relation to transactions between landlords and farm tenants. Regardless of which side of the transaction you are on, it is important to understand both points of view.

Stamp Duty Land Tax on commencement

This is often overlooked, but can be payable by the tenant. The calculation is complicated but fortunately there is a calculator on HMRC’s website which works out the Net Present Value of the rents payable. If the answer is more than £150,000, the SDLT payable is 1% of the excess.

Another trap here is where an initial tenancy of say 10 years is extended for a further 10 years. When a tenancy is extended in this way, a new calculation should be undertaken as if it was a single 20 year tenancy.

VAT on improvements

The issue here is that many landlords cannot recover VAT on expenses. Thus a landlord wishing to finance a new building may ask the tenant to pay the costs and then repay the net amount by way of a “landlord’s contribution”.

In most cases this will be effective, but HMRC may try to argue that VAT should be payable by the tenant on the money received from the landlord. Provided there is nothing in the tenancy agreement obliging the landlord to pay for improvements, VAT should not be due. The tenant will be able to reclaim the VAT on the building as long as it is being used for farming purposes.

Should the landlord Opt to Tax?

As noted above, landlords cannot normally recover VAT on expenses as the rent is an exempt supply. In many cases the landlord will not even be VAT registered at all. By making an Option to Tax election, the rent becomes a standard rated supply rather than exempt. This means that the landlord adds VAT to the rent demand and VAT on expenses can then be reclaimed by the landlord.

This should not be undertaken lightly as it remains in force for 20 years and VAT will have to be charged on a future sale of the land. Similarly a future tenant of land and buildings who is not VAT registered will be disadvantaged if an Option to Tax is in place.

Tax on compensation at the end of a tenancy

There are a number of different reasons why a tenant may receive money when a tenancy ceases. These include the desire to sell the land with vacant possession, and the landlord wishing to obtain tax advantages from farming the land themselves.

There will be parts of the payment that are subject to Income Tax, e.g. growing crops or crops in store. Other payments by contrast may be subject to capital gains tax. This is an extremely complex area, as in certain circumstances at least part of the capital sum can be classed as statutory compensation and be tax-free. This requires specialist advice to ensure the correct paperwork is prepared, and the tax-free sum is usually limited to the equivalent of five years rent. There is also a further exemption in respect of improvements made by the tenant.