Occupying Land - get the paperwork right

In this article I will be talking about a recent Scottish Land Court case concerning a dispute between a landlord and tenant of an Aberdeenshire farm. This case – Fyffe v Esslemont – concerned a landlord trying to bring a tenancy to an end, but the issues raised can equally apply to taxation.

In brief, the case revolved around whether the tenant was undertaking any agricultural activity, or instead had breached his tenancy by subletting the land. The farm had two separate areas of land:

1. Grassland which were subject to seasonal grazing, whereby neighbouring farmers brought their sheep onto the land. The problem here was that there was no paperwork and it was unclear which party was undertaking the husbandry on the land.
2. Arable land which was subject to a Contract farming Agreement. The contractor was a neighbouring arable farmer who did all the cultivation work etc. and then purchased the standing crop. The issue here was that the price paid seems to have been fixed and did not vary according to the condition of the crop.

The Land Court decided that there was no agricultural activity and the landlord gained vacant possession of the farm. For tax purposes there are a number of consequences if the owner of the land cannot show that they are an active farmer:

• Inheritance Tax relief will usually still be available on the land, but there will be no relief on the farmhouse. This is because there is no “working farmer” living in the house.
• The higher rate of Capital Gains Tax is likely to be payable on a future sale of the land. Similarly Rollover Relief is restricted if an asset has been rented out for part of the period of ownership.
• For income tax purposes the income is taxed as rent, which means there are fewer expenses which can be offset, and profits cannot be averaged.
• For VAT purposes rental income is usually exempt from VAT which restricts the reclaim of VAT on expenses. In some cases it might mean that the business cannot be VAT registered at all.

In conclusion it is important that the landowner is involved in the farming activities on the land and can show that they are taking some commercial risk. This may entail additional paperwork but this should be considered money well spent given the amount of tax potentially at stake.