Tenant Farmers Association Comment: Tenancy rules are ‘out of balance’ says TFA chief executive George Dunn

TENANT farmers are currently responsible for managing at least one third of our farmed landscape.

The separation of land ownership and land management should allow individuals to focus on their specific expertise.

Landowners can concentrate on long-term capital values and sustainable land use whilst tenants can give attention to farming competitively, making annual profits and as a result paying sustainable rents.

The landlord-tenant system can also deliver the right balance between providing liquidity to land (which is the most fixed factor of production in agriculture) and security for long-term investment.

For the vast majority of individuals who seek to enter the industry, agricultural tenancies remain the only, viable route available to create long-lasting, sustainable businesses.

However, an unhealthy tendency for landlords and agents to think short-term, together with an overarching desire to over-control is stymieing the ability of the tenanted sector to reach its full potential.

The TFA understands in the past that landlords had concerns about three generational tenancies which led to a reluctance to offer new tenancies to let.

Most Read

However, the Agricultural Tenancies Act 1995 (referred to as the 1995 Act) which introduced freedom of contract in all new tenancies has allowed the pendulum to swing too far in the opposite direction with average lengths of term now consistently below four years.

Whilst fully equipped holdings tend to be let for longer periods of time there is widespread use of “no fault” break clauses which effectively shorten the length of the tenancy to the first break clause, typically five years.

The TFA believes that the best way of encouraging longer term agreements is through manipulation of the taxation environment within which landlords make decisions about land use.

A big advantage to the taxpaying landlord is the ability to have 100% relief from Inheritance Tax for the agricultural value of their holdings let after September 1, 1995.

However, the TFA questions whether this relief should be so widely available.

In circumstances where landlords choose to let for short lengths of term there is little in the national interest to be gained from providing the landlord with such a generous tax advantage.

The TFA believes it is time to consider a radical reform of the Inheritance Tax framework for agricultural land which, whilst ensuring that bona fide farmers receive Inheritance Tax relief through a properly functioning scheme of Business Property Relief, removes Agricultural Property Relief apart from for those landlords who let their holdings for long terms, say for 10 years or more, without a landlord’s break clause.

The TFA also understands that a major disincentive for landlords looking to let land is the Income Tax treatment of the rent received.

The TFA believes that it would be unfair for a landlord who had decided to let on a long term basis to have to treat the rental income as investment income as opposed to earned income from which he could off-set costs and losses from his wider business interests.

The TFA believes that landlords letting for longer terms as defined above should be able to declare their income as trading income.

To deal with potential tax evasion, land owners who have entered into sham arrangements should come under greater scrutiny with regard to both income and capital taxation.

Such arrangements include what might appear to be agreements for contract farming, share farming, partnerships, grazing and cropping licences but which hide what in practical terms are tenancies given the negligible risk to which the land owner is exposed and the lack of his active management in the holding.

The tendency for over control is most ably demonstrated through the response of landlords to Common Agricultural Policy (CAP) reform which is again very topical.

Looking back to the last CAP reform in 2003, having seen an increase in the area of land let in every year following the introduction of the 1995 Act, in 2003 we saw a reduction as landlords sought to maximise their position in relation to the new CAP rules being introduced.

This continued in 2004 and 2005 and at the same time those tenancies that were granted had a high preponderance of seven year agreements .

These were aimed to coincide with the period of time over which the Single Payment Scheme (SPS) was intended to run.

Although in terms of the current reform we are only at the stage of having received the European Commission’s draft proposals, already we are seeing land banking by landlord’s taking place.

To resolve this we need two things. Firstly a workable test which allows only active farmers the ability to access support under the next incarnation of the CAP.

We need a definition which ensures that only individuals who are in effective occupation of land, bearing the entrepreneurial risk and in close management control are those able to access support through the CAP.

This would rule out most situations where landlords seek to control through legal means without having responsibility for any of the practical activity.

Secondly, we need a more potent link back to claims made under the SPS in 2011 to ensure that tenants are not disadvantaged in the transition from SPS to new direct payments.

It should not be possible for individuals to claim a greater amount of entitlement than they did in 2011 unless they have properly acquired additional land and have entered into unequivocal and free agreements with previous occupiers and claimants to transfer the right to claim payments under the new CAP.