Tenant farmers have lifetime security of tenure under the Agricultural Holdings Act 1986 (the 1986 Act) with, in some cases, a right to apply for succession tenancies for two further generations whereas they have security only for the contractual term under a Farm Business Tenancy (FBT) which was introduced by the Agricultural Tenancies Act 1995 (the 1995 Act) for tenancies created after 1 September 1995.  Inheritance Tax deals with the two types of tenancies differently, with land subject to 1986 Act tenancies attracting 50% Agricultural Property Relief (APR) and 1995 Act tenancies 100% APR. 

Landlords are keen to convert 1986 Act tenancies into 1995 Act tenancies whereas 1986 Act tenants wish to preserve their security of tenure, making the issue of express or implied surrenders and regrants an important topic and raising complex legal, valuation and taxation issues.

Inheritance Tax advantages for landowners with tenancies let on or after 1 September 1995 have led to an increase in the numbers of surrenders and regrants, usually done expressly. 

However, the parties may not be aware that their actions have caused an implied surrender and regrant, examples of which are the addition of land to the tenancy and an extension of the term of the tenancy.

When the 1995 Act was written it intended that you did not convert a 1986 Act tenancy into a FBT accidently.  Later the TRIG reforms were accepted and the Regulatory Reform (Agricultural Tenancies) (England and Wales) Order 2006 rewrote section 4 of 1995 Act.  Now, provided certain criteria are met, the old tenancy can be surrendered and a new tenancy granted on identical terms without depriving the tenant of protection under the 1986 Act.

The surrender of a tenancy is regarded as a disposal by the tenant, and granting a tenancy may be considered as a disposal by the Landlord.  Capital Gains Tax (CGT) is payable on disposals and so may affect both parties, although you should always check for available reliefs.  All tenancies of agricultural land that start after 1 September 1995 (not just FBTs) will qualify for 100% APR relief provided the land is considered ‘agricultural property’ by HMRC.

As the tenant is acquiring a new tenancy, a Stamp Duty Land Tax (SDLT) return should be submitted and any SDLT liability paid, although there is conflicting opinion here so always seek professional advice.

Granting an interest in land is usually exempt from VAT but there are exceptions the tenant has opted to tax; this is another area to check carefully.

These issues indicate the importance of consulting professional advisers at an early stage if you are considering a surrender and regrant of an agricultural tenancy.

For information about this or any aspect of rural business law contact David Wybar at Birkett Long LLP on 01206 217312 or david.wybar@birkettlong.co.uk