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HMRC internal manual

Capital Gains Manual

Compensation: displaced tenants: agricultural tenancies

1. Introduction

The guidance below considers the legislation applying to agricultural tenancies in:

  • England & Wales
  • Scotland and
  • Northern Ireland

 

The guidance then considers tenancies protected by the Agricultural Tenancies Act 1995 or the Agricultural Holdings Act 1986 and the protection they afford.

In particular, the guidance considers:

  • Security of tenure
  • Grounds for refusal to grant a new tenancy
  • Right to compensation
  • Amount of compensation
  • Compensation for improvements

 

The issue as to whether compensation received is chargeable to Capital Gains is considered, including the tax cases of:-

  • Davis v Powell
  • Davis v Henderson
  • Pritchard v Purves

 

Finally the guidance considers certain other issues connected with agricultural tenancies:-

  • Valuation
  • Wasting assets
  • Milk quotas

 

 

2. Legislation

England and Wales

In England and Wales the statutory rules which apply to an agricultural tenancy generally depend on when the tenancy began. Agricultural tenancies operate under the following legislation:

  • for tenancies beginning on or after 1 September 1995, with a few exceptions, the Agricultural Tenancies Act 1995 (ATA 1995) applies, while
  • for tenancies beginning before 1 September 1995 the Agricultural Holdings Act 1986 (AHA 1986) applies.

 

Scotland

Broadly similar legislation to AHA 1986 applies to agricultural tenancies in Scotland.

 

Northern Ireland

By contrast in Northern Ireland there is no legislation to protect agricultural tenancies, other than the obligation to give a full year’s notice to quit an agricultural or pastoral holding.

 

AHA 1986

The AHA 1986 provides the tenant with some security of tenure and provides that compensation is to be paid to certain displaced tenants.

Such compensation will not normally be within the scope of Capital Gains. To determine whether compensation paid to a tenant is statutory compensation, a basic understanding of the relevant parts of AHA 1986 is necessary.

A brief description of the relevant provisions follows below.

 

ATA 1995

Tenancies covered by the ATA 1995 are called ‘farm business tenancies’.

They do not have security of tenure and if a tenant has to quit his holding he is only entitled to compensation for improvements made to the holding which cannot be removed when he quits. This compensation is not chargeable to Capital Gain, see below.

 

3. AHA 1984

Security of tenure

Most agricultural tenancies are annual tenancies, that is they only last for one year but are automatically renewed for another year unless action is taken to bring them to an end. For Capital Gains purposes, an agricultural tenancy is treated as one continuous tenancy, not as a series of one-year tenancies.

A landlord can serve a notice to quit at any time, but that notice must not terminate the tenancy earlier than 12 months after the current tenancy is due to expire. For example, if a tenancy runs to 25 September in each year, a notice given in November 2017 cannot terminate the tenancy before 25 September 2019.

Agricultural tenancies have a lifetime security of tenure.  Those entered into before 12 July 1984 also carry statutory succession rights, on death or retirement. This means a close relative of a deceased tenant can apply for succession to the tenancy within 3 months of the tenant’s death.

Applying for succession stops any notice to quit given by the landlord on the tenant’s death (see Case G below).

Two tenancies by succession can be granted, so it is possible for the tenant’s family to work the holding for three generations. Farmers with a tenancy granted before 12 July 1984 can also name an eligible successor such as a close relative who can apply to take over the holding when they retire.

 

Grounds for termination

If the tenant is in serious breach of any of the terms of his tenancy, the landlord can terminate the tenancy without the need for the Court’s permission. The breaches in question are set out in cases C-G of Schedule 3 AHA 1986 as summarised below.

If the tenant is not in breach of the terms of his tenancy, he may oppose any notice to quit. In such circumstances, the landlord will have to obtain the consent of an independent tribunal in order to enforce the notice.

A brief summary of the breaches in Cases C-G set out in Schedule 3 AHA 1986 are:-

  • Case C - Failure to fulfil responsibilities in accordance with the rules of good husbandry.
  • Case D - Failure to comply with a notice given in respect of the failure to pay rent or remedy a breach of terms.
  • Case E - The interest of the landlord has been materially prejudiced which is not capable of being remedied by the tenant.
  • Case F - The tenant has become insolvent.
  • Case G - The death of the tenant.

The full legislation can be found at https://www.legislation.gov.uk/ukpga/1986/5/schedule/3.

 

Right to compensation

If:

  • the landlord serves a notice to quit, and
  • the notice does not specify any of cases C-G of Schedule 3 AHA 1986, and
  • the tenant quits the holding in consequence of the notice,

the tenant will be entitled to compensation.

 

Amount of compensation

The amount of compensation is normally five times the annual rent of the holding immediately before the tenancy ends.

In some cases the compensation due is higher, up to a maximum of six times the annual rent. In order to obtain a higher amount of compensation the tenant must give notice in writing under section 60(6) AHA 1986 to the landlord at least one month before the termination of the tenancy that he intends to claim a higher amount of compensation, and he must show that his ‘actual loss’ from quitting the tenancy is greater than one year’s annual rent.

‘Actual loss’ means the loss or expense incurred in the sale or removal of household goods, implements of husbandry, fixtures, farm produce or farm stock on or used in connection with the holding.

 

Compensation for improvements

The tenant is entitled to compensation for improvements to the holding which cannot be removed when the tenancy is terminated under Section 64 AHA 1986.

The amount of compensation is measured by the increase in value of the holding attributable to the improvement.

 

 

4. ATA 1995

Security of tenure

Unlike AHA 1986, ATA 1995 does not provide for security of tenure as it enables the landlord and tenant to agree upon most matters concerning the lease.

 

Compensation for improvements

The tenant is entitled to compensation for improvements to the holding which cannot be removed when the tenancy is terminated under Section 16 ATA 1995.

The amount of compensation is generally measured by the increase in value of the holding attributable to the improvement.  Full details are set out in s20 and s21 ATA 1995.

 

 

5. Is compensation chargeable to Capital Gains?

Davis v Powell (51 TC 492)

Following Davis v Powell, 51TC492, statutory compensation payable under Section 60 AHA 1986 is not chargeable to Capital Gains.

In that case, the taxpayer quit his holding as a consequence of a notice to quit issued by the landlord. The Courts held that the compensation was exempt from Capital Gains Tax as it was paid after the tenancy had come to a natural end and did not arise from the disposal of an asset.

Essentially, the reasoning was the same as that later used by the Court in Drummond v Brown, 58TC67, see CG72328 in subsection 4.

 

Davis v Henderson [1995] SpC 46 & Pritchard v Purves [1995] SpC 47

Often the landlord will not want to wait for the necessary period of notice to expire and will enter into a separate agreement, either oral or written, with the tenant. Under such an agreement, the tenancy will normally be surrendered early and compensation will be paid.

Such arrangements were considered by the Special Commissioners in Davis v Henderson, [1995] SpC 46 and Pritchard v Purves, [1995] SpC 47.

The Special Commissioners decided that although the tenants in both cases surrendered the remaining part of their tenancies under an agreement, they were still entitled to statutory compensation under Section 60 AHA 1986. The tenants had quit their holdings in consequence of the issue of notices to quit by their respective landlords.

In effect the surrender agreements were not the cause of their quitting, but part of the arrangements made for giving effect to the notices to quit.

 

Exempt compensation

If you are satisfied that:

  • a proper statutory notice to quit has been issued to the tenant, and
  • the notice to quit does not specify any of Cases C-G of Schedule 3 AHA 1986, see above, and
  • that he quit his holding as a result of that notice to quit,

then you may accept that the tenant was entitled to statutory compensation under Section 60 AHA 1986, whether or not the tenant served out his period of notice, and whether or not there was then an agreement for early surrender of the tenancy.

In worthwhile cases it will be necessary to obtain copies of the relevant documents and correspondence, for example the notice to quit and any surrender agreement, before any decision can be taken on whether the compensation is exempt or chargeable.

 

Amount of exempt compensation

Only the amount of statutory compensation payable, as set out above, will be exempt.

If the tenant receives more than that amount from the landlord the balance is chargeable as arising from the disposal of the tenancy.

Additionally, any compensation due by virtue of s64 AHA 1986 (for improvements), will be exempt.

In respect of tenancies covered by ATA 1995, only compensation due under s16 ATA 1995 (for improvements), will be exempt.

 

6. Other matters

Valuation

We accept that agricultural tenancies had a value at 31 March 1982 even though they are generally non-assignable.

Where the agricultural tenancy was held at 31 March 1982 and either the rebasing rules apply or the value at that date is required for indexation allowance purposes, the valuation question should be referred to the Valuation Office Agency in the normal way, see CG74000C.

 

Wasting assets

a) England and Wales

An agricultural tenancy in England and Wales which is covered by AHA 1986 should be treated as a wasting asset when the tenant’s life expectancy becomes less than 50 years.

If you consider that this is likely to be the case, you should seek advice from the Actuarial Team as to the predictable life expectancy of the tenant.

(This content has been withheld because of exemptions in the Freedom of Information Act 2000)

If a company is a tenant of an agricultural tenancy which is covered by AHA 1986, the tenancy is not a wasting asset.

An agricultural tenancy or farm business tenancy to which ATA 1995 applies, does not have security of tenure, and will usually be a wasting asset. The predictable life of the tenancy has to be determined as a question of fact at the time it is acquired.

 

b) Scotland

In Scotland, provided that there is a provision in the lease for its continuation from year to year, its duration should be accepted as being not less than 50 years and it should therefore not be treated as a wasting asset.

 

Milk quotas

Milk quotas were assets for Capital Gains purposes, see CG77820 for further information.

They ceased to exist on 1 April 2015.

Before that date, where the displaced agricultural tenant was a dairy farmer, they will have been forced to transfer the farm’s milk quota to the landlord. This was a requirement of the milk quota regulations.

In certain circumstances, AHA 1986 provided that the tenant should receive compensation.

Even if the compensation received under the AHA 1986 is exempt from Capital Gains, the compensation for the loss of the milk quota will be within the scope of Capital Gains, see CG77940.