What’s the right price for farmland?
Land, of any sort, is difficult to value. As accountants, we often have to value assets of one sort or another, and there are various tools that we can use to do so. However, none of these tools is particularly helpful when we look at farmland. Rental yield, when you take out some management costs, is miniscule, and there are many uncertainties, of which Brexit is only one. If we valued any other business asset with such uncertainties, we’d be looking at very substantial discounts, which would push the price of farmland down towards £1-2,000 per acre.
So why is the market value for farmland many times what it would be for any other business asset?
- 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 their house and sometimes even develop part of it for higher return.
- Farmland 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 farmland does come up for sale, conventional pricing models simply don’t apply for the neighbouring farmers. The opportunity to buy farmland is seen 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?”
- There are tax advantages to buying farmland. The inheritance tax (IHT) relief alone is valuable. Combine this with capital gains tax (CGT) rollover possibilities, and agricultural property is an attractive proposition. You can retire from another industry and eliminate a CGT liability, limit IHT exposure and acquire an attractive asset. Although the number of such investors is small, the market for farmland is very liquid so external investors coming head to head with neighbours who are also determined to buy will drive a piece of farmland to a price far beyond its economic value.
Perhaps the most telling answer to the opening question is a comment sometimes heard from clients: even those clients who will consult with their accountant on almost every business decision will sometimes say at the year end, “Oh yes, and we bought another 50 acres of farmland.”
If you’d like further advice regarding your agriculture property or business, please speak to your usual Larking Gowen contact on 0330 024 0888 or email email@example.com
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