Buying your farm tenancy – what you need to consider

Published: April 2020

Having the chance to buy your farm at a discounted purchase price due to being a sitting tenant can be an exciting prospect. Lower landlord returns on the capital invested is increasing the disposal of land and the low interest rates currently available is fuelling interest amongst tenant farmers keen to purchase their holdings at a discounted purchase price.

Andrew Connah, AMC Regional Agricultural Manager for North Wales and the North Midlands takes a look at the areas to consider before making this life-changing decision and why having rapid access to the right finance is vital when opportunities arise.

“In our region alone, we saw a 100% increase in loan enquiries for tenant farm purchases in 2016, and have continued to see strong demand for such finance ever since ” says Andrew. The drivers of that particular increase include the breakup of a significant estate and the sell-off of holdings by County Councils as well other institutions and private landlords. However, these factors that are increasing interest locally are affecting the whole country, as Andrew points out:

“Poor rental income in relation to current land values, particularly on older succession tenancies, means that many landowners are seeing their return on investment decline, which is boosting the supply side of the equation. On the demand side, many sitting tenants find themselves in a strong negotiating position and able to secure the holding at a significant discount to vacant possession value and secure funding at low rates of interest.”

Understanding the terms of purchase

However, as Philip Meade, Independent Land Agent with Davis Meade and appointed member of the Tenant Farmers Association’s recommended panel of professional advisors, explains, there are a number of variables that can affect the success of a tenant in negotiating a discount. “The tenant’s age, the type of tenancy, the likelihood of succession and the landlord’s own position will all come into play,” he says. “Being aware of clauses or terms associated with the future disposal of the land or planning permission, is also important.”

Potential purchasers must also consider any mineral or sporting rights associated with the land, which may be in the ownership of a third party. “Wherever possible, it’s preferable to have them included within the purchase,” says Tom Devey, solicitor with FBC Manby Bowdler. “Sporting rights exercised by a third party could raise potential issues with crop damage, livestock worrying and occupiers’ liability, and mineral rights may allow somebody to mine under the land leading to future ground stability problems.”

The impact of taxation

Looking to the future is vital agrees Mark Griffiths, accountant with Dyke Yaxley. “Purchasing a farm at a discount as a sitting tenant may seem like a huge benefit, but it can create a significant tax liability in the event of a full or partial re-sale of the land.” Taking tax advice ahead of any agreement is sound advice according to Roy Jackson, agricultural accountant at Whittingham Riddell. “If a single purchase consists of both residential and non-residential property, it will be subject to non-residential Stamp Duty Land Tax (SDLT),” he says “and, in certain cases where VAT is charged on the sale, SDLT will be chargeable on the VAT. This can see costs increase rapidly, but planning options are available.” Please note the changes in Wales from SDLT to Land Transaction Tax (LTT).

Securing the right funding package

Understanding the full extent of the cost of purchase means that buyers can work out affordability and the amount of borrowing required. “The agreement has to suit the unique circumstances of the individual business,” says Andrew. “There’s often a careful line to tread between wanting to pay off a large debt as soon as possible and minimising monthly commitments, to ensure the business does not become starved of cash, by taking the loan over a longer period.”

A bespoke funding package could meet both requirements, allowing a business to make higher repayments when surplus cash is available or keep payments to a minimum when cash flow is tight. Alternatively, interest only loans are more attractive for some people, as lower monthly repayments can free up cash to invest elsewhere. In an era of post Brexit uncertainty, the structuring of a loan to minimise future commitments, while at the same time retaining the flexibility to repay early, if possible, may be more valuable to some farming businesses than at any other point in recent history.

“There are lots of options that people may not have considered, but that make the opportunity for farmers to purchase their tenanted holdings more viable,” says Andrew. “If it’s something farmers have been considering for a while, now is a good time to discuss the options available and explore whether indeed it is the right thing for them.”

Buying your farm tenancy

Find out more about how AMC can help and the funding options available.