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Down on the farm

Rural land and buildings could be earning your client a useful income, says Jonathon Dixon, but do they know what they are letting themselves in for?

19 March 2013

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Most owners of rural property with land and buildings, whether they are traditional farmers or not, will usually ask how they can generate a financial return from their asset. Farm diversification can take many forms but, more often than not, such activities will involve other people making use of the assets.

Unfortunately, this is often when problems for rural property clients start. Land agents are often asked to assist when relationships between ‘landlord and tenant’ become strained, or when informal arrangements need to be regularised.

Effective property management can be as much about managing people as it is about managing the physical asset. As arrangements with tenants evolve and develop it is essential to make sure that all parties are absolutely clear about what they are occupying and the terms under which they do so.

Maximise assets

Letting buildings is a prime example of where income from property assets can be maximised. Clients can generate considerable income from ranges of farm buildings and yards occupied by every conceivable type of commercial enterprise. Examples include micro-breweries, landscape gardeners, exotic pet suppliers and physiotherapists.

Quite often these arrangements start on an informal basis as people look to make use of surplus space. But successful tenants may want more space and successful landlords in these situations tend to be those who are willing to be flexible and can accommodate expanding businesses. At the other end of the spectrum, they or their managing agent need to watch out for tenants who appear to be struggling – and take the appropriate action.

However, although flexibility is important, so too is insuring that all statutory regulations are adhered to, the planning situation is in check, the buildings are adequately insured and an appropriate form of tenancy is in place.

Trying times

It’s testing for a professional adviser to see some of the most profitable rural letting enterprises where landlords have pushed the boundaries of the planning system, relied upon various forms of dubious agreement and no doubt collected ‘rent’ from various parties in cash over the years.

While such arrangements may continue unchecked for years, inevitably the situation needs regulating. This may be triggered either through third-party intervention, such as a planning enforcement officer, or when the professional becomes involved. This could be a solicitor, accountant or a surveyor.

One key issue when looking at any rural letting with numerous occupiers is clarifying precisely who occupies what. It tends to start with a plan of the yard. Then it’s about attempting to delineate the boundaries of the various occupations and understanding which occupiers need access over other parts ?of the property. It is not uncommon to have shared services, access roads and drainage and all of this should be dealt with in the lease agreement.

The next step is usually about establishing what written agreements are in place, whether occupiers have any security or if they are willing to enter into new agreements. Of course, there are potential risks of creating security for any commercial tenants under the Landlord and Tenant Act 1954.

Although an occupier may theoretically have security under the Act, clients may need to take a practical view on whether tenants are likely to try to enforce their rights and whether, in fact, this would be a bad thing.

However, from a practical viewpoint, it is important to consider whether a formal Landlord and Tenant Act tenancy with notices to contract out of the security of tenure provisions is really appropriate in every situation. A tenancy at will or licence can be more appropriate, but this really depends on the individual circumstances.

Apart from buildings, land tends ?to be the main asset associated with rural property. Unlike some other assets, land – whether woodland or farmland – will require active management to generate an income and prevent it falling into disrepair.

One of the common conundrums faced by rural property owners is whether they want to be a ‘farmer’. Usually, this is not about getting your hands dirty, but about whether a property owner wants to be (or at least attempt to be) a farmer on paper. This decision tends to be driven by a desire to reduce tax or possibly to claim the single payment subsidy and will undoubtedly involve a relationship with a farm contractor, who is the party doing the real farming.

HMRC is now looking closely, particularly in inheritance tax cases, at situations where the taxpayer is purporting to be an active farmer. ?When a client wants to establish themselves as a farmer and enter into a contract farming arrangement of ?sufficient substance to satisfy HMRC ?of their farmer status, they must first consider their willingness to take on ?some of the risks associated with farming and whether they are willing and able ?to make farming decisions.

Different business

Agriculture

Farming (and particularly arable farming) is an exceptional business. It involves considerable expenditure in establishing a crop, which may or may not grow depending on the weather, and which there may or may not be a market for in the best part of a year’s time. Professional advisers must consider the practicalities of a situation before advising clients to take a particular course of action. A poorly drafted and managed contracting agreement can end up costing them money and, ultimately, will not achieve the intended tax position.

Equestrian

Aside from traditional agriculture, the equestrian industry has offered many rural property owners with an additional source of income. However, this is not without its pitfalls. The possible implications – from a tax perspective in particular – that a move away from farming to equestrian must be considered.

Horses are not generally considered as agricultural from a planning point of view and commercial equestrian yards attract business rates; insurance premiums can be prohibitive and there’s the cost of passports. The most successful equestrian businesses tend to be those that are an extension of the owner’s interest in horses. ?

Renewable energy

There is another potentially valuable income stream: renewable energy. This is a wide-ranging and fast-moving subject, but common principles apply when assessing this or any other diversification scheme. In particular, there are those that involve granting third-party rights over a property. These are:

  • What is the impact on the retained property or business?

  • What return is the venture likely to generate?

  • What are the planning or other statutory regulations and depending on how any equipment is acquired, whom am I granting rights to, for how long and what exactly can they do on my land? ?

The days of generous grant funding for rural projects have gone, but some support is available, especially in the agricultural sector. It is important for any rural property owner to be aware of what may be available and have a clear plan for any venture before investing time and money.

Jonathon Dixon is associate partner in the rural team at BTF Partnership