The unintended consequences for tenant farmers facing tax relief changes

Tenant farmers across the country could be faced with unintended consequences that the Government has not considered or understood.

There are likely to be considerable concerns for tenants both sides of the Scottish border who may be faced with a tax bill and no financial means to pay it.

In Scotland, under the Agricultural Holdings (Scotland) Act 1991, the tenancy does not die with the tenant, it can be passed on for generations and there is also a financial value to vacate the tenancy, perhaps 20-30% of the farm value.

Martin Hall, Davidson & Robertson Senior Director & President of CAAV

Tenancy value has been tested in case law (Baird and Walton 1992), but with current agricultural tax exemptions, there would be no tax to pay. From April 2026, under the new legislation, tenancy value will be considered as part of the tax liability if above the £1m threshold.

For a farm worth £5m, that tenancy value may equate to £1.25m. Looking at smaller lowland family farms of around 300 acres, the £1m threshold could be reached before the working capital for livestock, machinery and other assets are included.

Whilst owner occupiers have the opportunity to release capital from land assets, that is not the case for tenant farmers. They have no means to sell land, profits are too low to pay for this financial liability, and banks won’t lend based on tenanted acreage. There are around 4,000 Scottish tenancies that could potentially be affected.

Following a meeting with Scotland’s Tenant Farming Advisory Forum (TFAF), Jeremy Moody, Secretary of the Central Association of Agricultural Valuers (CAAV), sent a letter to HM Treasury office highlighting this issue.

In England & Wales, around 30%* of agricultural land is under tenancy agreements, and while the tenancy cannot be sold it still has a financial value that the HMRC will take into account.

Martin Hall, Senior Director at Davidson & Robertson, and President of CAAV said “It is likely that with differences in Scottish and English law, the tenant implications have not been fully considered or understood by the Government. The solution could be to raise the threshold to a realistic level, something like £10M - this would cater for most family farms and take the tenancies out of the equation.

“There are other unintended consequences for tenant farmers to consider. Ambitious and entrepreneurial tenants looking to develop their farm or diversify will be adding value to the farm which would bring an increased tax burden in the future.”

Commenting further Martin said: “It is important that we push government to recognise and address the tenant tax trap in their IHT plans. And it is equally incumbent on the agricultural industry to initiate far sooner, their discussions with family and advisors around succession and retirement plans.

“On a positive note, getting the younger generation involved at an earlier stage of their careers is a good thing, because so many farmers carry on well past pensionable age before considering handing over any reins.

“In terms of valuations, we will see much more demand as farmers start planning for the longer term and for succession. And it is likely that these valuations will be under much more scrutiny by HMRC as there will be potential tax income to the treasury.”