Land, of any sort, is difficult to value. As accountants, we are often required to value assets of one sort or another, and various tools have been developed to do so. But none of these tools are particularly helpful when we look at agricultural land.
Rental yield, when taking out some management costs, is minuscule and there are many uncertainties, of which Brexit is only one. If we valued any other business asset with such uncertainties, we would be looking at very substantial discounts which would push the price down towards £1000 to £2000 per acre.
So why is the market value, even in a highly uncertain era, many times what it would be for any other business asset? The answer to this question is threefold:
- Firstly farmland is an attractive asset. Unlike company shares, farmland is there to look at. An owner can walk over it, shoot over it, use it to enhance the setting of his house and sometimes even develop part of it for a higher return.
- The second reason is that it is a long term asset. The lack of liquidity keeps the market in a tight cycle of supply and demand. Only 1 or 2% of UK farmland comes onto the market in any year so when land does come up for sale, conventional pricing models simply don’t apply for the neighbouring farmers. The purchase is regarded as a once in a lifetime chance so the pricing equation is often simply “how can I raise the money?” rather than “is this the best investment for that money”
- Finally, there are the tax advantages. Agricultural property is an attractive proposition for someone retiring from another industry who can eliminate a Capital Gains Tax liability, limit Inheritance Tax exposure and acquire an attractive asset. Although the number of such investors is small, the market is very illiquid so external investors coming head to head with acquisitive neighbours will drive a piece of land to a price for beyond the economic value of the income stream.
If you have any questions about the value of your farmland or how you can take advantage of tax reliefs that may be available, please contact Holly Mitchell from our Rural Business tax team on 01903 234094.