Tax free compensation for leaving a tenancyk

To terminate an Agricultural Holdings Act (AHA) tenancy, a landlord can serve a notice to quit under s25 of the AHA 1986 Act.

If the tenant is unwilling to accept the notice to quit, the tenant can serve a counter-notice which then refers the notice to Tribunal. The Tribunal would then need to consent to the notice before it can be treated as valid.

AGRICULTURAL HOLDINGS ACT 1986 SECTION 60 TAX FREE COMPENSATION

Where a valid notice has been served by the Landlord under either of these situations, the tenant will be entitled to compensation.

Section 60 of the Agricultural Holdings Act legislation outlines the tax-free compensation. This is made up of both a basic and additional compensation element.

There are two variations of the basic compensation, which is either one year or two years rent, as set out in section 60(3) parts (a) and (b). To qualify for part (b), which would be two years compensation, you do need to prove that your loss as a tenant was two years rent or more.

Section 60(4) states that the amount of additional compensation shall be an amount equal to four years’ rent holding.

This could therefore provide compensation up to six years rent capital gains tax free. So, a farmer paying £30,000 per year of rent could have up to £180,000 of tenant’s compensation tax free.

Care needs to be taken with the timing of any compensation received as this could jeopardise the taxfree position.

TENANT IMPROVEMENTS

When you exit a tenancy, it is also important to look at the cost of any buildings which you have erected or any improvements that you have made as tenant, as these would be deductible from the taxable compensation in arriving at the chargeable capital gain.

In addition, if the tenancy was in place before 31 March 1982 then the tenancy could have a base cost (being a March 82 valuation), which could be set against the taxable compensation.

APPORTIONMENT OF TENANT’S COMPENSATION

The compensation would then be apportioned between the assets on the farm. These might consist of say a farmhouse, let cottages and farm buildings.

For capital gains tax purposes, these assets could be subject to different tax rates and, where available, capital gains tax reliefs.

For instance, if you have lived in the farmhouse for as long as you have been a tenant on the farm, the farmhouse should qualify for principal private residence relief for capital gains tax purposes, which would mean no tax is payable on any compensation allocated to the farmhouse.

Any capital gains tax on the cottages would be chargeable at a rate of 18% or 28%, depending on your level of income, with residential properties being subject to these higher rates of capital gains tax.

Compensation allocated to the land and buildings would either be chargeable at 10% or 20%, depending on both your level of income and whether Business Asset Disposal Relief (BADR) applied.

Depending on your circumstances, other reliefs, such as rollover relief - which enables you to defer the gain - might also be available.

As you can see, the apportionment and the timing of tenant’s compensation can change the tax position considerably. With thought and imagination, we can assist you to make the most of these allowances.