UK land prices boosted by Budget

Land prices could be driven up even further by changes to capital gains tax announced in yesterday's UK emergency Budget, it is claimed…   

According to Simon Dixon Smith of consultants Savills farmers and landowners have enjoyed a surprisingly benign capital tax regime and forward planning will allow future liabilities to be kept to a minimum under the change which has increased CGT to 28% for higher rate tax payers.
‘The increase is perhaps a fair compromise but although the lack of any taper or indexation will be a disappointment to long term holders of assets the change in CGT may drive up land prices further,' he explained.
‘As the economy picks up and new capital gains are generated we could see a resurgence of interest in rollover relief into agricultural land, particularly from business sellers looking for a new asset class that is seen as a safe haven and Inheritance Tax efficient. Where average land prices are £6,000/acre buyers benefiting from Rollover Relief could afford to pay more than £2,000/acre extra,' he added.
He pointed out that one of the reasons for the current lack of supply of farmland in the market is the tax disincentive to sell on retirement. If a farm qualifies for Agricultural Property Relief and Business Property Relief then on death all previous capital gains are written off and the asset can pass down without Inheritance Tax.
But the Chancellor's decision to increase entrepreneur's relief to £5 million means that the vast majority of farmers would be able to retire and sell with Capital Gains Tax restricted to 10%. ‘Tax planning thereafter can ensure that any future Inheritance Tax liability is kept to a minimum,' he said.
The prognosis comes as the latest report on farmland property shows it has outperformed the commercial markets for the third consecutive year.
The IPD UK Rural Investment Property Index, sponsored by Smiths Gore and Carter Jonas, shows that capital growth value is the main driver of total return performance.
‘Of overarching importance to investors is the fact that farm land continues to perform well during recessions and is a useful asset to have in a portfolio. The capital drivers remain three fold; farmers buying land when the opportunity arises, people purchasing for lifestyle and leisure reasons and investors purchasing for the fiscal benefits,' said Gerald Fitzgerald, head of property valuations and investments at Smiths Gore.
‘Our research suggests that the farm land market will continue to perform well as pent-up demand is met with limited supply of market stock. Demand is increasing from all types of buyer looking for attractive places to live,' he added.
Supply of land for sale remains tight and is likely to remain at low levels compared with the 1980s and 1990s, he added. The reform of the Common Agricultural Policy is likely to start to affect land markets in the next 12 to 24 months as landowners won't sell their land in case they miss out on a windfall in the reform.
‘Although rural property does not provide the high income return that other asset classes can produce in the short term, it does have long term potential for capital growth,' he added.