A serious overhaul of property taxes is needed to ease the strain on Scottish farmers being hit with “unfair” charges which add to pressures on their business, a rural law specialist says.
Susan believes an influential study published earlier this year was a “missed opportunity” to highlight to MSPs a way in which they can support tenant farm enterprises in particular.
The Scottish Land Commission’s report, Land Reform and Taxation: Advice to Scottish Ministers, made a series of recommendations related to Land and Buildings Transaction Tax (LBTT). But they did not recognise the fact that LBTT is charged on leases - the impact of which on agriculture Tim believes has been overlooked for too long.
“This is a significant missed opportunity to make a real difference to the bottom line of many farming businesses. We see this with many of the clients we work with. It’s an issue they raise with us.
“If the Scottish Government wants to put its devolved powers to maximum use as regards LBTT, it could exempt agricultural leases from the tax. The loss to the treasury would be small, but the benefit to tenant farmers would be great, as they would no longer suffer the costs of complying with the three-yearly review regime for reporting what are usually modest amounts of tax.
“Indeed, most of these leases are never going to pay more in tax than the tenant’s professional fees for submitting the returns every three years. At the very least, there should be relief for the residential component of a tenant farm’s rent. The absence of this is unfair.”
Housing in rural communities is the subject of Scottish Land & Estates’ flagship conference in Edinburgh on Tuesday, May 17. Housing Secretary Shona Robison will be among the speakers.
Tim, who has highlighted his concerns about LBTT via Scottish Government consultations on the issue, will be one of the delegates there.
LBTT is charged on purchases and on leases, with the buyer or tenant paying the tax. Leases are subject to a regime of three-yearly reviews, to ensure that Revenue Scotland is kept up to date with rent increases and other changes over the lifetime of the lease - and additional tax is paid if the rent rises.
Ordinary residential leases are exempt. Agricultural leases, however, may include residential property but there is currently no recognition of that nuance or relief for the residential component.
Fears that farming families are unfairly hit by the Additional Dwelling Supplement (ADS) - the so-called “second home surcharge”, where an additional 4% charge is added to anyone buying additional dwellings, such as holiday homes or buy-to-lets.
Tenant farmers who buy the farm they have rented for years face the charges where the deal includes not only the main farmhouse but another cottage or cottages on the holding. They find themselves paying ADS on all of the homes - even if they have lived in the farmhouse all their life.
The same applies if only one house is bought with the farm, but the buyer owns another house somewhere else, perhaps where their parents, who they have succeeded in running the farm, live.
In this scenario the buyer will own two dwellings. Because they have not sold a previous home, there is no “replacement main residence” relief, so they pay ADS on their family home.
Issues with the surcharge could be resolved by taking two steps.
“Firstly, there should be an exemption from ADS for all dwellings which will be occupied for agricultural purposes,” he said.
“A farmer buying a cottage for agricultural workers to live in is in a very different position from a second-home buyer or somebody building up a buy-to-let portfolio - the targets of the policy - but pays ADS all the same. This might be conditional on the occupation being rent-free, if workers are housed there.
“If this were implemented I would expect a clawback of relief if the house later came to be occupied for another purpose, such as a residential or holiday let. This relief would apply whether or not the buyer was previously a tenant on the same farm.
“Secondly, anyone buying their home from their landlord - farmer or not - should be treated as ‘replacing their main residence’ and thus not pay ‘second home surcharge’ on their main residence.
“If you agree, why not write to your MSP?”
LBTT: How it affects tenant farmers in practice
A tenant enters into a 15-year lease of a farm and farmhouse. The annual rent is £28,000 for the land and agricultural buildings, and £12,000 for the farmhouse. If the tenant takes the farmhouse on a separate residential tenancy, they will pay LBTT only on the £28,000 a year Modern Limited Duration Tenancy (MLDT): a bill of £1,724.
But then the landlord will be able to evict them any time they decide to sell, even if the farm lease still has many years to go. The tenant may then be unable to work the farm without a nearby house, but is still committed to paying rent for the farm until the 15 years are up.
For better security, the tenant would prefer to include the farmhouse within the MLDT. But then LBTT will be charged on the whole rent of £40,000: a bill of £3,106 - almost twice as much.
The LBTT regime creates a perverse incentive to take the less secure option when it comes to agriculture.
If there were LBTT relief for even just the residential component of the rent, this would mean the tenant taking a single MLDT of the farm including the farmhouse, but paying LBTT on a rent of £28,000 instead of £40,000. This might be conditional on the relieved properties being occupied for agriculture, so that the farmhouse and any cottages occupied by workers would qualify, but not cottages let to holiday makers or residential tenants.
Article published 11 May 2022.
