BIM55245 - Farming: tenant right
S25, S33 Income Tax (Trading and Other Income) Act 2005, S46, S53 Corporation Tax Act 2009
Tenant right (or way-going) is the compensation to which a tenant farmer may be entitled, from the landlord or sometimes the incoming tenant, at the end of a tenancy. A clause stipulating payment of a sum based on a similar type of valuation may also be included as a condition of sale of the freehold of a farm. A full tenant right valuation may include:
- produce (hay, straw, silage and roots)
- growing crops (possibly at a valuation which includes a `harvest award’ - see below) and pastures
- unexhausted manure values and sod fertility (see BIM55455)
- tenant’s improvements and fixtures
- a deduction for dilapidations.
Such valuations are not acceptable as annual stock valuations for the purposes of computing trading profits (see BIM55460). However, when a tenancy ends or a farm changes hands, any payment received in respect of tenant right or way going will be relevant for Income Tax purposes and should be dealt with as follows.
Where a tenant right payment is apportioned between capital and revenue, the same apportionment should normally apply to both the recipient and the payer.
Items which can be regarded as trading stock
That part of any tenant right payment which relates to items of trading stock (such as the first three bulleted items above) should be included as a trading receipt of the outgoing farmer regardless of whether:
- the trade is treated as continuing, or
- the trade is treated as discontinued (except in cases where a farming trade carried on by a single individual is discontinued by reason of his or her death, . In such cases, trading stock held at the date of discontinuance should be valued at the lower of cost or net realisable value).
`HARVEST AWARDS’
In some areas, an outgoing tenant is entitled to receive compensation for certain growing crops (sometimes called the `way-going’ crops) at a valuation which includes both:
- cost (including `acts of husbandry’, which may include the farmer’s own labour)
- an additional amount (sometimes called the `harvest award’) representing the enhancement value to the incoming tenant of the growing crop.
In other words, the crops may be valued on the basis of their net value (after deducting harvesting and similar expenses) when mature.
Any harvest award received on outgoing should be taken into account as an amount realised on the sale of trading stock (except in cases where a farming trade carried on by a single individual is discontinued by reason of his or her death, see above).
Tenant’s improvements and fixtures
That part of the payment which relates to tenant’s improvements and fixtures is likely to be capital in nature and may possibly give rise to capital allowances or Capital Gains Tax consequences.
Dilapidations
As regards dilapidations, the principle in BIM43265 should be followed and a deduction allowed in so far as the dilapidations are of a revenue character. Where an ingoing farmer makes a payment for tenant right which includes a reduction in respect of dilapidations, the reduction should not be treated as a trading receipt but the amount of any expenditure covered by the compensation payment should be excluded in computing the trading profits. Any balance should be carried forward and set against any deduction for dilapidations when that farmer quits the holding.
As regards provisions for dilapidations, see Helpsheet 232 reproduced in BIM55410.
Premium for vacant possession
An outgoing farmer may claim to exclude from his or her trading profits computation part of the amount paid to him or her for tenant right etc on the ground that it represents a premium for vacant possession. Such a claim should not be admitted unless we are satisfied that the payment made by the ingoing farmer includes not only a fair valuation for live and dead stock, farm implements and tenant right, but also a premium for vacant possession (sometimes described as goodwill). If such a claim is substantiated the premium should be excluded from the computations of Income Tax liability of both the recipient and the payer. As regards Capital Gains Tax, see CG72300 onwards.
Professional fees for the valuation of tenant right
As regards the admissibility of professional fees for the valuation of tenant right, see BIM55290.