Conversion of AHA tenancies to FBTs brings complex tax questions for landlord and tenant

When converting an Agricultural Holdings Act (AHA) 1986 Tenancy to a Farm Business Tenancy (FBT), under the 1995 Agricultural Tenancies Act in England and Wales, there are several key questions that both landlord and tenant will have to consider when negotiating a surrender and regrant arrangement.

Martyn Dobinson, partner, and member of the firm’s Land and Rural Practice Group, says:

“The surrender and regrant of the tenancy is a point of negotiation between landlord and tenant, and can therefore provide opportunity for both parties with both having different motivation for seeking a change. For example, the landlord may wish to bring some land in hand to farm themselves, or a portion of land included within the AHA may have been zoned for development under a local area plan. On the other hand, a tenant may wish to give up the AHA tenancy, particularly if there are no close family members who wish to take it on under their AHA tenancy succession rights.”

The key tax considerations below need careful thought:

Has either party opted to tax land or buildings for VAT?

If not, this may be worth considering. Opting to tax could allow the recovery of input VAT on any related professional fees incurred. Additionally, the default position is that rents paid or received under an FBT are typically exempt from VAT, so a taxpayer’s partial exemption position could be impacted if there is no option to tax in place.

Has the tenant made any improvements under their tenancy and will compensation be due from the landlord for these?

This will be a key factor in the negotiations, and elections in respect of the capital allowances position may be required by both parties.

Will the new FBT be granted at a discount to market rates?

If so, then it is likely that there will be a tax charge on the deemed premium (being the difference between the rent paid and the market value), with implications for both income tax and capital gains tax (CGT) for the landlord. From the tenant’s perspective, dependent on the sums involved and length of the lease, it is possible in some circumstances that a stamp duty land tax (SDLT) charge could arise on the regrant of the FBT.

Are any other assets being transferred to the tenant as compensation for the surrender of the AHA?

If that is the case, there will likely be CGT implications, even if no cash changes hands between the two parties. Obtaining current market valuations (and the CGT base cost) of any land or property being transferred is important and will allow any tax charge to be calculated ahead of the transaction being concluded. Where there are no cash proceeds received, any CGT charge will need to be funded from existing cash reserves or funds will need to be raised from elsewhere to pay the tax due.

Martyn adds:

“Clearly there will be significant tax implications for both landlord and tenant in negotiating the surrender of an AHA tenancy and grant of a new FBT, affecting both parties to the deal. These arrangements can often be complex, with many nuances depending on the specific case, so the advice of a professional advisor in these situations is especially important.”