SURRENDER OF AGRICULTURAL TENANCIES

Where an agricultural tenancy is surrendered, often compensation is paid to the outgoing tenant. Depending upon the terms of the agreement and the way in which the compensation is paid, the tax treatment of the receipt by the tenant can vary.

Where the tenancy began before 1 September 1995, the Agricultural Holdings Act 1986 (AHA 1986) applies. For tenancies commencing after that date, the Agricultural Tenancies Act 1995 (ATA 1995) applies. The difference can be significant for tax purposes – an AHA 1986 tenancy brings with it security of tenure and provides that statutory compensation can be paid to displaced tenants. A tenant under an ATA 1995 tenancy will only be entitled to compensation for improvements made that cannot be removed.

Where a tenant is entitled to compensation, part or all of this may be exempt from capital gain tax (CGT). To qualify, the landlord must issue a statutory notice to quit. The notice must not detail any of the 5 specific cases of breach of tenancy:

1. Failure to fulfil responsibilities in accordance with good husbandry,
2. Failure to comply with a notice given relating to a failure to pay rent or remedy a breach of terms
3. The interest of the landlord has been materially prejudiced which is not capable of being remedied by the tenant,
4. Insolvency of the tenant
5. Death of the tenant

The tenant must subsequently quit as a result of the notice.

The statutory compensation equates to five times the annual rent on the date immediately before the tenant quits the holding. However, if the tenant is able to show that his actual loss as a result of quitting the tenancy is greater than one year’s rent, he can give notice in writing to the landlord under section 60(6) AHA 1986 at least one month before the termination of the tenancy that he intends to claim a higher amount. The statutory amount can then be increased to six times the annual rent. Note if part of the holding is given up early and the rent reduced as a result, the amount of statutory compensation could also reduce.

If the landlord and tenant subsequently enter into an agreement for the tenant to leave the property early, entitlement to statutory compensation remains provided they ultimately leave as a result of the initial notice to quit issued by the landlord. As such, the statutory notice should give the required 12 months after the current tenancy is due to expire, but the tenant can choose to leave earlier.

Any compensation received in excess of the statutory amount will be liable to CGT. In such circumstances it will be important to obtain an apportionment of the excess between the various components of the property – farmhouse, land, buildings and any let properties. The tenant will need to calculate CGT on each part. Reliefs such as private residence relief and business asset disposal relief may be available depending upon the use of each part. If the tenant subsequently uses the proceeds to acquire replacement business property, rollover relief may also be available deferring the gain arising.

Care should be taken when considering a tenancy surrender to ensure that the opportunity to claim the statutory compensation is not missed and all reliefs are considered if CGT does become due.

For the landlord, if the compensation is paid to enable an onward sale of the property at a higher value, this should be a deductible cost against the sales proceeds, reducing any CGT payable. It is generally not deductible against any rental income.