Fall in farm commodity prices

The fall in farm commodity prices has cut the profits from rural investments in the UK.

The total return in 2015 was 5.5 per cent – a decline of about 5 per cent from 2014’s return of 10.4 per cent.  This is the most subdued return since 2008 and reflects a slowing in the market after several years of very robust returns.

These figures come from the IPD UK Annual Rural Property Index which is sponsored by Carter Jonas and Savills. The Index tracks the performance of 1,873 properties with a combined capital value of more than £3 billion.

Caution around future market uncertainty was reflected in rural land capital growth, which reduced to 4.1 per cent in 2015 from 8.9 per cent in 2014. The decrease in the rate of capital growth made the most significant contribution to the decline in the total return.

As head of Carter Jonas’ rural team in the South West I believe the market is patchy but there is no doubt that the fall in commodity prices has had a very real impact on farm incomes and this in turn has impacted on confidence in the farming community.

More recently, political debate around Britain exiting the EU and the effect this may have on the agricultural industry has further dented confidence.  Now the level of uncertainty has ratcheted up a notch since the Leave campaign won the day.  However the vote is not likely to have much impact on world commodity markets and therefore farmers and investors are likely to continue being selective about investing in farmland.

All these factors have contributed to the land market cooling as farmers and investors are concerned that it will be a while yet before confidence returns to the agricultural economy. 

But farming is a long term industry and although rural incomes returns remain low at around 1.3 per cent according to the index, where land comes available for the first time in a generation, neighbouring farmers will very often still be interested in buying it. 

This is not least because in the long term land has often been seen as an excellent investment and they aren’t making any more of it. 

James Stephen MRICS FAAV
Partner
Rural Practice Chartered Surveyor, Wells
T: 01749 683381
E: james.stephen@carterjonas.co.uk

Farmers thinking twice about investing

With commodity prices falling many farmers will be thinking twice about making any significant investment in their farm but for some, with a bit of imaginative advice from your accountant it may be possible to use your pension fund to invest in a new farm building for example and in so doing cut the overall cost of such an investment.

For example Mike Butler, partner at Old Mill accountants who have recently moved to new offices in Wells, recently helped a Wiltshire based farming business save more than £180,000 on building a new grain store.

“The idea is that you use a self-invested pension to pay for the land and build costs,” he says. “That provides tax relief against profits of between 20-45%, depending on whether you trade as a company, sole trader or partner.”

Once built, the farm can then rent the grain store off the pension fund. The rent paid by the farming business will be a tax deductable expense, thereby saving income or corporation tax while the rent received by the pension fund can either be used to build up reserves in the fund or to pay off any borrowing which the fund may have taken out to support the cost of the project.

Obviously this only works if the underlying business is profitable and is therefore able to pay the rent but if this is the case, significant savings can be made. However, such a project requires careful planning to avoid any pitfalls. “Start planning well in advance to allow the financial planning team to register the pension fund, take care of invoicing and pricing, and ensure appropriate VAT is reclaimed in good time,” warns Mr Butler.

“You also need an exit plan in place to release the pension funds when you do come to retirement.” This can be done by selling the building on the open market, selling back to the farm business, or, ideally, to another pension fund set up by the younger generation.

But clearly some farm buildings, particularly if they are located in the heart of a farm building complex may be difficult to sell on the open market and so if selling in this manner is your chosen exit strategy, I would advise that you take care to ensure the building is suitably located so that it is saleable.

So if you are contemplating making a significant investment on your farm and also have an eye on your long term retirement plans I suggest you approach your accountant to investigate the potential available to you.

James Stephen MRICS FAAV
Partner
Rural Practice Chartered Surveyor, Wells
T: 01749 683381
E: james.stephen@carterjonas.co.uk