Landed Estates Annual Review 2017/media/Files/S/Saffery-Champness/docum… · pounds of conservation support becoming increasingly hard to secure. However, 80%-90% of farm output

Landed Estates Annual Review 2017

Contents

Welcome 1

Brexit: threat or opportunity for farmers and landowners? 2

The HHA looks to the future 5

An entrepreneurial spirit 8

In good company? 10

Accounting for natural capital 12

How to remove an option to tax 16

Divorce and its tax pitfalls 18

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Welcome

We publish our 2017 Landed Estates Annual Review at a time of great uncertainty for the sector, though what is potentially a threat to one business model may well be an opportunity for another.

I am delighted to be able to report that our team has continued to grow over the past year, both via internal promotions and new appointments. David Chismon in Bournemouth, Sally Appleton in Harrogate, and Coll Murchison-MacDonald in Inverness are all now partners, and we were recently joined by Mark Hill in our Bristol office. Mark brings many years’ experience of working with land-based businesses, particularly in the food and agriculture sectors. Details of our team can be found on page 21.

In our first article, Jeremy Moody speculates about what the future might hold for farmers and landowners in a post-Brexit world and we shed light on what other countries’ agricultural subsidy regimes look like.

James Birch, the new President of the Historic Houses Association, very kindly agreed to speak to us about what the future holds for his fellow historic house owners and his hopes for his four-year tenure as President.

Niall Macalister Hall of the Torrisdale Estate in Kintyre, explains more about his diversification into gin production and plans to create a gin tasting room and visitor attraction. Phil Cryle of eftec outlines how landed estates can better assess, understand and communicate the benefits of their environmental management programmes and the value they afford their wider communities (so-called ‘natural capital’).

We are very grateful to all of the external contributors to this issue.

Our other articles look at the important considerations when structuring business interests, the tax pitfalls of divorce and how to go about removing a building’s ‘option to tax’ for VAT purposes.

This publication is intended as a broader look at the issues facing our land owning clients; I do hope that you find it both interesting and useful. My fellow partners and I are happy to discuss any of the topics here, whether you have general questions or are seeking professional advice on specific issues.

Liz Brierley Head of Landed Estates

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For months before and after the EU referendum last year, pro-Brexit UK farm minister George Eustice was promising a more “sensible, proportionate and coherent approach to regulation”, cutting red tape and getting rid of superfluous and cumbersome administrative regulations from the EU. Trade flows would progress easily on mutual recognition, he said.

A rosy, prosperous and less burdensome future for UK farmers beckoned and despite a few warnings flagged up by farmer and landowner organisations, at least 60% of British farmers duly signed up to leave the EU. This was, of course, despite EU farm support to the tune of around £3 billion last year – a sum which DEFRA has pledged to maintain (but only until 2020).

The current mood

At the NFU conference in January 2017, farmer confidence already appeared to have taken a knock. The prevailing inclination was to press for subsidies at least at current levels, for trade and tariffs to remain as they are, and for continuing access to migrant labour – the backbone for modern production until robots can pick and sort, as well as cart crates and pallets.

The NFU is busy trying to substantiate a case for farm subsidies to continue after the UK leaves the EU. A new report commissioned from Development Economics states that farming delivers £7.40 back to the economy for every £1 invested in agriculture, and says farming contributed £46.5 billion to the UK economy in 2015.

Farm ministers from the UK’s devolved administrations in Scotland, Wales and Northern Ireland are also furiously trying to work out how their agricultural policy might be shaped.

Andrea Leadsom, Secretary of State for Environment, Food & Rural Affairs could not yet have much to offer by way of detail while proclaiming great prospects for the future of rural communities. At the NFU conference she described the EU’s Common Agricultural Policy (CAP) as “a blunt tool that offers little reward or recognition for the services you provide to this country” and “desperately complicated” and said she was “determined that we will do so much better for farmers when we leave the EU”.

What might the future look like?

Much is at stake: one in eight people work in food, farming and the countryside. Will we really be able to devise our own regime around our own needs? Will we get our seat back in global negotiations?

It will be complex, with much to play for, according to Jeremy Moody, secretary and adviser to the Central Association of Agricultural Valuers (CAAV).

The Brexit timetable has to allow for months of circling, exploring and researching, not dissimilar to the normal process of CAP reform, which itself will be undergoing the start of major changes as pressure mounts to justify public expenditure (there are rumours of a potential 15%-25% cut in EU funding for the CAP).

The main agreement and its ratification, when it all comes together, is likely to have to be before March 2019, Jeremy suggests, when the European Parliament goes into re-election. All this points to the main decisions about Brexit needing to be made by, perhaps, September 2018 for ratification over the winter.

On the home front, a UK General Election in May 2020 means that around 15 months clear space ahead of this is desirable from a political point of view.

Brexit: threat or opportunity for farmers and landowners?


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“Article 50 is skeletal, but the core is that the process starts on that two-year timetable. If we don’t complete negotiations, we just drop out of the European treaties, and therefore simply cease to be a member of the EU,” says Jeremy Moody. “We need to negotiate a withdrawal agreement, taking into account the framework of a new relationship. I suspect that in the time available we can only do ‘heads of agreement’ to allow for transition periods for matters such as trade over the five years or so after Brexit.

“We cannot negotiate trade deals until we know our relationship with Europe, which has to mean post-September 2018. This points to a transition over the years 2020-2025.”

The focus of negotiations

Most people want to talk about farm support, and stories abound of profit for many farms under threat, and millions of pounds of conservation support becoming increasingly hard to secure.

However, 80%-90% of farm output is what it sells in the marketplace, Jeremy points out. The critical issue will be trade, and different sectors will be affected in different ways: almost 40% of our lamb production, for example, is exported and some 96% of that goes to the EU. For beef and dairy trade, the UK is a net importer.

Tariffs may need to be negotiated. “We have them at 3%-4% on most manufactured goods but agriculture moves into very significant rates.” The default position is that we resurrect full membership of the World Trade Organisation, leading to a spike in tariffs for agricultural goods and a return to quotas. “UK tariffs would wreck Irish trade, and there are complex supply chains in which goods may cross borders four or five times. So it is conceivable that we end up with 0% tariffs.”

Mutual recognition and equivalence of standards will be important. And what about fabled third country trade deals? What does open trade with the US, Brazil or India actually mean? Significant volumes of more cheaply produced product can come in.

Jeremy says the UK could not remain in the Single Market if it had no voice in making trade or economic decisions. About 40% of the UK economy is traded, and about 40% of this is traded with the EU — about 15% of our GDP is directly to do with trade in Europe, he says. Perhaps more with complex supply chains taken into account. That leaves some 85% of the economy outside the Single Market. The UK would want to set its own rules for the domestic market, while other countries will have their own rules for our exports to them. “It’s very difficult even to see how we can be in a customs union — we could not negotiate third country deals – but that creates the conundrum of the Irish border.

“All this gets me to the running conclusion that it is worthwhile, in a world in which we cannot forecast the outcome, to assume that we will move into a more challenging business environment. Farming adapts most in hard times. Commodity prices are already in a long-term decline. It is not new – we are just now moving the furniture around quite a lot. If, say, Brexit is March 2019, we could have a trade framework and the rest will play out in the 2020s.

“The government’s tone on migrant labour is much more emollient now than it was in October. I think the political world understands seasonal labour – but everything else will have to be fought for or explained.

“We have the biggest opportunity since 1947 to think afresh about how we want to shape farm support, the landscape and food production, and then how we manage that change,” says Jeremy. “We will get there. It is an opportunity to think very hard, and to look at the rest of the world, especially the US, Canada, Australia, and New Zealand. This is not about a tweaking of the present CAP – it is the opportunity for a fundamental rethink with all the tools we have, from permitted development rights to tax relief.”

We have the biggest opportunity since 1947 to think afresh about how we want to shape farm support, the landscape and food production.

Support regimes in other countries

US agricultural policy is one of the most complex in the world, even surpassing the EU. Support is largely commodity and insurance-based, with additional support

provided during periods of low price or low output. The incentive to reduce production is weak, and there are many initiatives to encourage farming and environmental benefits – there have been up to 10 concurrent schemes to promote biofuels, for example.

Canada continues to manage supply in the dairy and poultry sectors, but also operates a number of more modern stabilisation programmes to support

incomes, including savings schemes, margin insurance, and disaster relief.

The Australian farming industry is now strongly market-oriented. In a simple, low-cost system, half of the agricultural budget is spent on support to general services,

environmental conservation and R&D programmes, and the main policy instruments prevent severe income losses for farmers through disaster assistance and tax concessions.

New Zealand abandoned all farm support in systems in 1984, deregulating the sector in a general framework of economic reform, with national

frameworks for land and water quality. It is a major exporter, with support provided only for animal disease control and disaster relief. Extension support is largely funded by a producer levy.

Extremely high support regimes in Norway, Japan and Switzerland come at a cost that includes more expensive food.

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Devolution compounds the challenges. “We are going to have to have a UK-wide external trade policy, and four devolved agricultural/rural policies,” Jeremy points out. Wales may look to be fairly close to England in its thinking, but Scotland may wish to see less change.

England is likely to emphasise resource protection. “While England might wish to phase the basic payment out, practicality might yet see it re-worked, with requirements for soil and water management. There will be much talk of supplying public services, such as flood management.”

Funds might also be released at various levels to support ‘better business’ and productivity in the sector through research, knowledge transfer, IT, robotics and genetics, and perhaps capital investment. “We will also, inevitably, see more discussion about management and tenure structures,” adds Jeremy.

Brexit could release a level of pent-up structural change, as some become larger commodity producers (and hence more exposed to risk) while others will seek more stable diversification and income.

“We are getting the Great Repeal Bill, but despite its name it is to re-enact huge amounts of EU law,” Jeremy suggests. “Everyone will want to pick at it, but it will take two or three decades to digest much of it.

“Take newts: Europe is short of them, but we are not. That could be a domestic change in policy, while perhaps being more sensitive about other things instead.”

With thanks to freelance writer and editor Catherine Paice, former business and land editor of Farmers Weekly.


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The HHA looks to the future

While modern architecture might set pulses racing or teeth on edge, depending on one’s perspective, opinions are seldom divided over the attributes of historic houses. As Simon Thurley, former Chief Executive of English Heritage recently put it, “historic architecture… immediately appeals to the aesthetic eye”.

The continued and viable existence in private ownership of so many historic houses is due in no small measure to the efforts of the Historic Houses Association (HHA). James Birch (pictured) has recently become the Association’s tenth President, and kindly spent some time with us to reflect on the outlook during his tenure.

The HHA came into being in 1973. Its broad policy aims are to promote privately owned heritage, to promote and market its members’ houses, to lobby the government for a level playing field among heritage sectors, and to provide technical advice for members.

The path to the presidency is largely voluntary. Unlike the executive Director General, who might have some background in the heritage or public sectors (or both), the President will emerge from a consensus among the membership. The path will likely begin in one of the HHA’s 13 regional committees and proceed via the two specialist committees and the board. A contested election to the post has yet to occur.

Moreover, the presidency would not appeal to all members. It is voluntary and time-consuming. But for James, who is passionate about historic houses and the built heritage generally, the HHA is full of good people, works well, and the presidency is an honour and a delight.

The future of the HHA

The HHA currently has some 1,600 members (owners of the historic houses) and almost 50,000 friends (paying subscribers). Creditable as the friends figure is, James hopes to improve upon it. After all, he reasons, of the members’ houses some 300 open their doors to the public for a set duration each year and 200 more open with a prior appointment.

The HHA’s offering comfortably exceeds the 200 open houses owned and operated by the National Trust and English Heritage, but those bodies’ members (paying subscribers) are 4.5 million and 900,000 respectively. The aim is to make those larger memberships much more aware of what the HHA has to offer and to attract some of them, and the welcome income they would bring.

Achieving such a transformation will not be easy. But work is afoot subtly to burnish the HHA’s image among prospective consumers. Some serious work is getting underway to revisit the look and feel of the way the HHA communicates with its various audiences. James is keen to ensure that no option is left unexplored, whether that means looking again at the organisation’s name or rethinking the way it uses its various channels, from Historic House magazine to social media.

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Another change might be some additional work on the website, as a vital portal for members of the public as well as a resource for the house owners themselves. These and other ideas are all in train and being discussed in early 2017 as the board prepares its forward strategy.

Less simple will be the house opening arrangements. The offering from the National Trust and English Heritage is pretty uniform, while HHA Houses are more ad hoc. This cannot change overnight for—and this is absent from most calculations of the National Trust and English Heritage—members are no more homogeneous than any other strand of society and their houses are in most cases, including James’s as described below, their family homes.

While the HHA encourages opening it recognises that not all members favour it. Some might delight in welcoming the public while others might recoil; for some, opening will be dictated by commercial considerations—weddings, tea rooms, and other commercial outlets; for others it might just be the price of conditional exemption from capital taxes. And some properties, depending on their layout, are more suitable for admitting the public than others.

Tax incentives

As for taxation, the HHA will seek improvement of the incentives stemming from maintenance funds (trust funds to support maintenance preservation and repair of historic houses), which attract some favourable capital tax treatment. Since their inception in 1976, those incentives, probably more collaterally than by design, have been seriously eroded and can no longer be said to adequately represent the cross-party policy of 1976.

This is particularly true of the taxation of income paid out from the fund—all the more disappointing given that income may not be applied other than for ‘heritage’ purposes: it cannot leak out, say, to the member’s family. Capital gains tax levied on disposals for reinvestment within the fund is also unhelpful.

The backlog of repairs to historic buildings has reached record levels, and James attributes this, at least partly, to the cumulative erosion of tax incentives: the abolition

in 1998 of the ‘One Estate Election’ (a means to offset certain expenditure against income to reach a net taxable amount), the withdrawal of relief from VAT on repairs to listed buildings, the cap on ‘sideways loss relief’, and the high taxation of income and capital gains in maintenance funds.

Meanwhile, the HHA has publicly welcomed recent largesse elsewhere. This includes £80 million to sustain English Heritage’s portfolio (support also to Historic Environment Scotland), multi-million pound grants for the repair of Westminster and Buckingham Palaces, and £7.6 million for the Wentworth Woodhouse Preservation Trust. The 1,600 private owners have not sought anything like these sums: the estimated annual cost of improving the maintenance fund provisions is only some £10 million. Moreover, members’ outlay, such as on insurance, is likely to be greater than in the charitable sector.

James’s hope is that the government will be attracted to a ‘Heritage ISA’, a snappy term to encapsulate the improved incentives which a not-very-expensive measure would secure. He and his team will be devoting their resources to persuading Ministers at the Treasury and Department for Culture, Media & Sport. This would not only benefit members’ houses but boost the construction, specialist and ancillary trades which the repairs, and their fruits, would generate.

Of course, the government might retort that the way to greater fiscal freedom lies in preservation trusts. But James’s response here is that charitable status would eliminate the individuality which attracts the public: the house would become a museum and decisions made by trustees. He continues that it would be sad if this were the only route to a level playing field and besides, the disposition of most owners is one of custodianship, not personal benefit, which resonates much more with charitable ethos than the tax system allows.

Cogent as the case might be, James is under no illusions that the government will come round with any alacrity. Quite rightly, Ministers must be persuaded of the benefits, and must balance the HHA’s requirements with others’; and it would be unrealistic not to recognise that some are unfavourably pre-disposed. But James is confident that the case will win through on merit. And perhaps the proposed domestic changes will assist here.


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Doddington Hall

Away from the presidency of the HHA, James and his wife Claire own and manage Doddington Hall in Lincolnshire. Built in 1595, it has never been sold, its exterior remains unchanged, the original walled gardens survive, and the most recent major refurbishment internally was in 1760.

James and Claire have built on their inheritance by opening and extending their farm shop, and adding other retail outlets. Visitors to the property have increased from 4,000 to 25,000, and the commercial footfall exceeds 300,000. This might be expected to cause some tension with the privacy which family life sometimes requires, but at Doddington there is a natural separation between the hall and the new commercial ventures.

Essential to this success has been astute and realistic evaluation of what the premises and its environs offer.

Fellowship within the HHA helped too, as Chatsworth and other houses have provided advice and even training for some of the 110-strong workforce (up from 20). Doddington will spread its own expertise too when others set out on a similar path. After all, competition comes from supermarkets, not fellow members.

James pays ready tribute to the many other members whose commercial success helps support their own properties. Indeed the HHA’s message is very much that members do not simply want largesse from the government: they work very hard to do things for themselves. The challenges and costs are high but so too the public benefit, as anyone visiting or passing by an historic house will testify.

James has no one overriding ambition for his term as President, but incremental progress of a very effective and happy organisation. Our best wishes go with him.

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Gin might not be the first spirit you’d expect to be produced on a traditional highland estate, but nevertheless 44-year-old, Niall Macalister Hall, the current laird of the 1,200-acre Torrisdale Estate in Argyll, is hoping that Kintyre Gin, his new venture, will be a great success.

Niall is the fifth generation of his family to live at Torrisdale Castle on the picturesque Kintyre Peninsula, overlooking the Isle of Arran. Along with his wife, Emma, and his younger brother, Kenny, he has recently set up Beinn an Tuirc Distillers Limited (meaning hill of the wild boar), Kintyre’s first small-batch distillery.

Niall admits that the idea of putting some of the estate’s redundant outbuildings to use as either a small-batch brewery or distillery has been with him for some time:

“I did a degree in rural resource management in the early 90s and was thinking about the possibility of diversification, even back then. We have a traditional courtyard of buildings and for a long time I wanted to start up a brewery, producing local beer. The beer idea morphed into gin more recently, partly due to its enormous popularity at the moment. Thinking practically, it is also a lot easier to produce compared to both beer and whisky.

“With whisky, you’ve got to lay it down for three years before you can actually sell it as whisky, but with gin you can produce it in a couple of months. It’s ready to bottle pretty quickly and, crucially, you can get your product out of the door and get it sold. The fact that I like gin more than whisky may have also played a part in the decision.”

It is certainly a market that is booming. In 2016, gin sales in the UK were up by 16% and, for the first time ever, broke the £1 billion sales mark. According to the Wine and Spirit Trade Association, 40 new distilleries opened in 2016 and three out of every four bottles of gin imported around the world originate in the UK.

Sustainability

Since taking over the estate in 2010, Niall has embraced renewable energy. A 170 kW biomass boiler now serves several properties on the estate and a 99 kW ‘run of river’ hydro-electric scheme on the nearby Lephincorrach Burn provides electricity for 90 houses and, importantly, powers the copper still that produces the gin.

Scotland’s unique spring water has a long association with malt whisky production and so Niall is also capitalising on this as a vital ingredient in the estate’s gin. Taken directly from a Victorian spring located just above the distillery, the water is gravity fed directly to the distillery where it is used in the gin-making process.

Additionally, for every case of Kintyre Gin sold, a tree will be planted in a dedicated woodland area, leaving legacy on the estate for future generations.

Outside help was essential to get the project off the ground, and a chance meeting with an Edinburgh-based whisky expert led to Niall connecting with Leon Webb, who had done some work with Harris Gin. Leon was subsequently employed as a consultant to create Kintyre Gin’s distinctive blend of botanicals and its unique taste. As the venture gained momentum, Su Black has joined the team as Head Distiller, on a full-time basis.

Niall was able to secure an innovation business grant from Highlands & Islands Enterprise (HIE), which helped them to develop their original recipe. Niall also worked closely with HIE in developing a solid business plan for Beinn an Tuirc, and is aiming to break even or to show a modest profit within the first 12 months of operating, based on sales of 5,000 bottles. The aim is to produce up to 20,000 bottles per year within five years and continue to grow from there.

Crowdfunding

Crowdfunding is one way that Niall and his fellow directors are looking to raise funds for the new venture and to raise awareness amongst potential consumers. They have even made a film in which Niall and Emma discuss the significance of the ethical and sustainable elements of their business.

An entrepreneurial spirit


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Levels of support have been impressive and funders receive various rewards – from a gift voucher to a distillery tour and weekend away on the Torrisdale Estate.

Bigger plans

The gin distillery is just one part of Niall’s ambitious plans. The Torrisdale estate is well-located to capitalise on Scotland’s successful tourist industry and since the 1980s has been letting out accommodation to tourists.

Work is already underway to convert the farmhouse next to the distillery into a visitor centre with a tasting room and shop and Niall sees further opportunities to expand the estate’s offering:

“We have scope to convert further space to a gin school potentially; we could have visitors coming for a tour where they sample our gin, they get a tour of the distillery, they look at our hydro-scheme, and then they plant a tree – possibly a juniper tree – on site.

“Because we have accommodation, we could potentially run day or weekend courses where visitors come and stay, try our wood-fired hot tub, try our gin, and even have a go at making their own gin.

“However, that’s definitely phase two. We are very much focused on getting the distillery up and running at the moment.”

Surprisingly, Niall doesn’t think of himself as an entrepreneur, though he does admit to having lots of ideas, the more “ridiculous” of which have included plans for ostrich farming, worm farms and crayfish farming.

Niall is keen to point out that things may not be as idyllic as they seem for landowners such as him. The changing tax system and the withdrawal of non-domestic rates relief on hydro schemes has seen his tax bill treble at the last revaluation. He also acknowledges that public perception can be a big issue in Scotland, given the government’s land reform agenda. But Niall is tackling this head-on:

“The government thinks the community should have more of a say in estates such as ours. We have to work with that and so we have pledged to donate a percentage of our profits, when we’re up and running, to support local community projects and help to fund other local business start-ups.

“We need to be doing everything we can to help local employment and bring people back into the area because de-population is a real issue for areas like Kintyre, where many younger people are drawn away to work in larger towns and cities.”

For more information, visit: www.kintyregin.com or www.torrisdalecastle.com.

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In good company?

With an increasingly divergent tax system and far more information now being made available publicly, how best to structure your business interests can become a complex decision. At the heart of this will be not only the need to operate tax efficiently, but also in a manner that fits with how comfortable you feel operating as a company.

Differing tax rates

Let’s first look at the changing tax landscape and the current tax rates:

Basic rate

Higher rate

Additional rate

Income tax rates

Individual: non-

dividend income20% 40% 45%

Individual: dividend

income over £5,0007.5% 32.5% 38.1%

Capital gains tax rates

Individual:

non-residential10% 20% 20%

Individual: residential 18% 28% 28%

1 April 2016

1 April 2017

1 April 2020

Corporate tax rates

20% 19% 17%

Where an individual has non-dividend income in excess of the basic rate band they will pay tax at 40% and where their income exceeds £150,000 they will pay tax at 45%. This is a striking contrast to the rate at which companies pay tax, which for the 2016-17 tax year is 20% and will decrease further to 19% with effect from April 2017.

It is these diverging rates that are making taxpayers, where they currently operate as an unincorporated business, consider the transition to operating as a company.

However, the government introduced new rules for the taxation of dividend income, effective from 6 April 2016, whereby the first £5,000 of dividend income received will be covered by a dividend allowance. This allowance will reduce to £2,000 from 6 April 2018. Above £5,000 per tax year, dividend income will be taxed depending on the taxpayer’s marginal tax rate.

Dividend income that falls within the personal allowance does not count towards the dividend allowance, which means that it is possible to receive £16,000 of dividend income tax free (2016-17 rates) if you had no other income. However, the increase in dividend income tax rates reduces the attractiveness of withdrawing dividend income from a company. Scrutiny of the figures is needed to establish the most beneficial position and those with a high proportion of dividend income will be most affected by these increased rates.

Incorporating a property portfolio

Where a property business is operated as an unincorporated business, all rental profits are taxed at the taxpayer’s marginal rate of tax (20%, 40% or 45%). A company, on the other hand, pays tax at 20% (currently), decreasing further in April 2017.

A consideration for many landlords is the incorporation of their property portfolio in order to access the lower corporate tax rates.

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Incorporation relief allows the assets of an unincorporated business to transfer to a new company without generating a capital gains tax charge. It is a requirement that all assets (except cash) are transferred to the new company and that there is a business that is being transferred.

Without incorporation relief, a capital gains tax charge will arise on the market value of the properties at the date of the transfer of assets to the new company, less acquisition costs. In a recent tax case (Elizabeth Moyne Ramsay v HM Revenue & Customs) the courts allowed the taxpayer’s claim for incorporation relief on the transfer of her property letting business to a company; this was on the basis that she was carrying on a business for the purposes of incorporation relief.

This is an important case and demonstrates what needs to be in place for a letting business to be considered a business (and incorporation relief available), as opposed to there being a passive activity where incorporation relief would not be available.

It is important to be mindful that there can be Stamp Duty Land Tax charges when transferring property between connected parties, such as to a company owner by the transferor.

Privacy issues

Whilst the corporate regime provides lower tax rates, one of the disadvantages is that it is difficult to provide privacy for family members who are involved in the company.

We have seen media coverage ‘naming and shaming’ wealthy landowners in receipt of the Common Agricultural Policy (CAP) single farm payment. This information was obtained from careful scrutiny of publicly available information and though there was nothing to suggest that the recipient of the CAP payments had done anything wrong, it did nevertheless provide unwelcome attention for those individuals named.

A small limited company (one with a turnover of less than £6.5 million and less than 51 employees, even if the balance sheet exceeds £3.26 million) only needs to file abbreviated accounts. For some businesses, the fact that they have to publish their annual financial accounts (even if abbreviated) may not matter; however, in a competitive supply chain, the availability of these accounts can be unhelpful.

The PSC register

All UK companies, including wholly owned subsidiaries, dormant companies, companies limited by guarantee, unlimited companies and charitable companies are required to create and maintain a register of those people who have control over them. This is known as the PSC register.

This system has replaced the annual return previously filed at Companies House, which confirmed who the directors and shareholders of the company were. The PSC register goes a step further, by naming the person or entity with significant control of the UK company (more than 25%).

For simple ownership structures based wholly in the UK, this new regime is unlikely to present any significant difficulty, but it does provide much more easy access to information on significant shareholdings.

For some businesses, the fact that they have to publish their annual financial results (even if abbreviated) may not matter; however, in a competitive supply chain, the availability of these results can be unhelpful.

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Accounting for natural capital

Nature underpins our economy and society. It provides the goods and services that are essential for us to live, work and play. Yet it is fragile and pressures such as climate change and population growth present a real threat to livelihoods and to future generations.

Political momentum for action to protect and enhance the natural environment is growing and the UK government has committed to developing a long-term plan for nature.

The basis for this plan is that we need to find better ways of managing our natural assets or we risk losing the vital benefits that we receive from them. There are now a range of tools to help land owners and managers to identify and understand the long-term benefits of good environmental management. This article focuses on one such tool, the corporate natural capital accounting framework.

Introduction to natural capital

Recent work done by bodies such as the UK Natural Capital Committee and the Natural Capital Coalition has sought to understand, quantify and value the link between environmental management and the production of environmental goods using the concept of ‘natural capital’.

Natural capital is described by the Natural Capital Committee as the parts of the natural environment that produce value to people (both directly and indirectly). This includes ecological communities, species, fresh water, land, minerals, the air and oceans, as well as natural processes and functions. It is perhaps more intuitive to think through the lens of individual habitats (such as woodlands, farmlands and fresh waters) which are made up of natural capital.

A range of environmental goods and services, including crops, timber, livestock, plants, carbon capture and recreational activities, are produced from natural capital

Phil Cryle is a Senior Consultant at eftec, an environmental economics consultancy. He explains how UK estates can better assess, understand and communicate the long-term benefits of their environmental management programmes.


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Natural capital Environmental goods

Ecological communities Food

Soils Fibre (eg timber)

Freshwaters Energy

Land Fresh water

Minerals Clean air

Atmosphere Climate regulation

Subsoil assets Recreation

Oceans Amenity

Biodiversity/conservation

Figure 1: Natural capital conceptual framework

by combining it with other forms of capital (eg machines for harvesting timber or crops). This is illustrated in Figure 1.

Natural capital includes both renewable and non-renewable environmental goods. For renewable goods, their production depends upon the condition of the habitats and the underlying natural capital. A well-managed estate, where the habitats are kept in good condition, produces a greater quantity and/or quality of product over time. Improved production directly benefits the estate owner through greater revenues, but local communities can also benefit from the improvements in the estate as they use it for walks and field sports etc.

Corporate natural capital accounting

The natural capital within an estate is an asset to a landowner, due to the environmental goods it provides. A corporate natural capital accounting (CNCA) framework has been developed by eftec for the Natural Capital Committee in order to understand and communicate the value of natural capital.

The CNCA is equivalent to a financial balance sheet for natural capital, it:

y Identifies readily available information on estate management costs and reorganises these to measure the cost of maintaining natural capital and producing benefits;

y Estimates the private benefit that the landowner receives as well as the external benefit provided to wider society; and

y Compares the full benefit of natural capital within an estate to the cost of maintaining them.

Figure 2 outlines the benefits that are captured in the natural capital balance sheet and shows that some produce a private value, others external value and some (fresh water and recreation) a mix of both.

The external benefits provided by estates can often have a much higher value to society than the income received from private benefits. However, without an associated income, these external benefits do not show up in a traditional balance sheet. To ensure that these external values are visible, the CNCA framework expands the scope of the financial balance sheet. This can be important for many reasons, including funding applications and engagement with local communities.

Ecosystem service flows

Inputs from other capital

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Case study: Forest Enterprise England

Forest Enterprise England is responsible for the management of the Public Forest Estate in England, which covers an area of approximately 250,000 hectares (see Figure 3) or 1% of England’s land area. The natural capital account balance sheet was developed by eftec in conjunction with Forest Enterprise England, building on their existing financial accounting and property management systems and data.

Figure 3 shows Forest Enterprise England’s balance sheet. This reveals that the largest private benefits are from timber (£207 million), whereas the largest external benefits are carbon sequestration (£7,595 million). The private costs (liabilities) associated with maintaining the Public Forest Estate are £484 million and the external cost of volunteer time spent on the estate is £31 million.

The estimated net value of the Public Forest Estate is £11.9 billion (in 2016), based on a gross asset value of £12.4 billion and liabilities of £0.5 billion. It also shows the huge external value (£11.9 billion) that these assets provide to

wider society, compared to the private value it accounts for (approximately £0.5 billion). The implication from this is that by only assessing the value of the Public Forest Estate based on private value (as in a financial balance sheet) the estate is extremely undervalued.

The Forest Enterprise England account has been the first application of the CNCA framework of an organisation’s entire estate. Simon Hodgson, Chief Executive of Forest Enterprise England, commented:

“The government has made a long-term commitment to keeping the Public Forest Estate in public ownership and so it is important that we understand the full benefit of England’s national woods and forests to society and that we manage for the long-term, to increase its natural capital and deliver greater public benefit.

“The CNCA approach enables us to understand and communicate the value of the Public Forest Estate to government and society and to understand how the decisions we make about managing the estate impact on its value over the long-term.”

Figure 2: The range of values captured in a natural capital balance sheet

External value (welfare)Private value (income)

Fibre (eg timber)

Food

Energy

Fresh water Recreation Amenity

Biodiversity/ conservation

Clean air

Climate regulation


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Why produce an estate level CNCA?

Understanding the full range and value of goods that are produced by the natural capital assets within their estate and comparing this to the cost of maintaining a productive estate is useful for landowners as it can inform their decision making and communication with local stakeholders.

Understanding the full range and value of benefits provided by an estate as well as the trade-offs (across different assets) leads to better management decisions. Decisions that are based only on partial information, as provided by a financial balance sheet, are likely to focus on maximising private income to the organisation at the expense of wider benefits to society. As the Forest Enterprise example shows, these external benefits can be highly valued by society, even though an income is not received for their production. Therefore, the CNCA allows landowners to:

y Communicate the total benefit that their estate provides to the local community and wider society. This can be important for interactions with regional and local authorities as well as local communities that have an interest in the way an estate is managed. For example, the Forest Enterprise account reflected the significant value provided to society from an asset which had previously been undervalued by government;

y Illustrate the diverse range of benefits that an estate provides and their value, especially the wider benefits to society. These can be useful in matters relating to funding and planning applications as well as promoting links to local communities and businesses;

y Inform strategic thinking about natural capital and other capitals (eg social, physical), including understanding risks and opportunities associated with the management of natural capital and linking this to the production of environmental goods and associated costs. For example, the Duchy of Cornwall account revealed the importance of soil as an asset to the estate’s profitability and value to wider society. The estate is now working to gather more systematic information on soil condition and management to include in their business accounts; and

y Illustrate the impact of a transition towards sustainable land management, for example by signing up to agri-environment schemes or restoring natural habitats, by reporting the additional value the estate delivers from one year to the next, as the benefits of improved stewardship are realised.

At Saffery Champness, we feel that our clients should be aware of the growing natural capital debate. There are clearly environmental and stewardship implications that this concept seeks to measure, which lie behind many commercial decisions our clients make every day.

Figure 3: Forest Enterprise England’s balance sheet

At 31 March 2016 Private External Total

Assets £m £m £m

Minerals 3 - 3

Timber 207 - 207

Wild game 1 - 1

Plants and seeds - 22 22

Carbon capture - 7,595 7,595

Recreation (283) 4,880 4,597

Government funding 575 (575) -

Gross asset value 503 11,922 12,425

Liabilities

Total maintenance (484) (31) (515)

Total net natural capital assets

19 11,891 11,910

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How to remove an option to tax

Making an option to tax (OTT) often seems to be a good idea at the time. Businesses use it to help recover VAT on property costs or to qualify for VAT relief when purchasing commercial property as a transfer of a going concern.

However, and sometimes years later, a property that is opted to tax can be a burden and can limit the possibilities for sale or leasing to potential buyers who are unable to recover VAT.

What should a business do if it wants to get rid of an OTT?

Revoking an option to tax

Getting rid of an OTT is difficult to achieve and, typically, can only be done after twenty years have passed since the election was made. There are two main routes to revoking:

y Either on a specific OTT that has been made; or

y After making a real estate election on a parcel-by-parcel basis.

When revoking a specific OTT previously made, application is made in writing to HM Revenue & Customs (HMRC) using the relevant form. The conditions that must all be met for automatic permission are:

a. The taxpayer must have made the OTT more than 20 years ago;

b. The property cannot be subject to the Capital Goods Scheme (CGS);

c. The taxpayer cannot have made any supply of the property at below market value in the previous 10 years; and

d. No prepayments should have been made by the taxpayer that are attributable to the taxpayer’s supplies of the building more than 12 months after the option is revoked.

Where only condition (a) is met it may still be possible to revoke an OTT, but only with prior permission from HMRC. It can be important to know if automatic permission will be available if time is a factor in a sales process.

Revoking part of a global option to tax

Businesses that opt to tax under a single ‘global’ OTT, or where multiple properties are part of the same OTT, may be required to revoke the entire OTT and ‘re-opt’ the areas they wish to remain opted to tax. This can be a time consuming and confusing process and it may not be possible to revoke the entire OTT. A real estate election is a different way of achieving the same outcome, but it does have its drawbacks.

The real estate election is a relatively under-used way of making an OTT. Many people have ignored the option because once made it automatically opts to tax all properties the business has an interest in or acquires an interest in in the future. The business can only opt out of automatically opting to tax every new property interest acquired on application to HMRC and in very specific circumstances, with early and proactive action. For these reasons, many businesses are nervous of real estate elections.

However, a real estate election can be more flexible when a business is already able to revoke an existing global OTT or one or more multiple OTT:

y A real estate election can convert an existing single global option to tax into many single smaller OTT for each designated area of land specified at the time of the election.

y The business may then subsequently select the plots of land it wishes to revoke at the business’ discretion, subject to meeting the relevant revocation rules at that time (ie the 20-year rule).


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This offers a great deal of flexibility to a business wishing to revoke discrete parcels of land.

Due to the way real estate elections operate, businesses will need to be proactive in managing land acquisitions to ensure that if an option to tax is not desirable it is removed on application to HMRC, meeting the relevant conditions.

Potential consequences

While revoking an OTT may assist the purchaser or tenant by reducing their VAT bill (and potentially Stamp Duty Land Tax or Land and Buildings Transaction Tax) it can have unexpected consequences for the owner.

A sale or lease of a property is exempt from VAT after revocation of an OTT by the property owner. There is normally no recovery of VAT on costs relating to that sale or lease. Where a business may lose VAT recovery on a sale or lease from revoking the OTT, the buyer or tenant may agree to pay the lost VAT through adjustment to the agreed sale price or rent.

What may be unavoidable and unexpected for the business is a cost arising from clawback of VAT previously recovered under the CGS. Following revocation of the OTT, an exempt sale (or letting) could trigger a requirement to pay VAT where over £250,000 (net of VAT) had been previously recovered on the purchase, a refurbishment or extension of the property in the last 10 years, or on the construction or purchase of a new building on the property. You may recall from the conditions listed for revoking an OTT, disclosure of whether the property is within the CGS is a requirement for automatic permission.

If your business is contemplating a sale or lease of a commercial property that has been subject to an OTT for more than 20 years and you are concerned that the OTT will limit interest from buyers, you may wish to consider if revoking the OTT is possible. There are several ways to revoke such an OTT and each one has it benefits and drawbacks. Businesses need to be aware that an OTT can have unexpected consequences that need to be anticipated and planned for to prevent a nasty surprise in irrecoverable VAT costs.

The real estate election is a relatively under-used way of making an option to tax. Many people have ignored the option because once made it automatically opts to tax all properties the business has an interest in or acquires an interest in in the future.

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Divorce and its tax pitfalls

We return to our fictional estate owning family, the Summerton Winters, to discover that the next financial issue the family is having to deal with is brought about by the decision of Ted and Angela to divorce.

Readers will recall that the Summerton Estate is owned by Ted who is married to Angela and they have three adult children and one grandchild. Ted inherited the estate from his uncle in the early 1980s. Unfortunately Ted and Angela, who married in the late 1970s, have very slowly drifted apart over the last decade and have realised that staying married is not what either of them want.

They have had many discussions about this and, having known a few friends who have divorced, they are aware that separating can, amongst other matters, create financial issues. Not least, divorce can create tax liabilities. They are resolute that they do not want the taxman to benefit from their separation and ultimate divorce.

What do Ted and Angela want from the divorce?

They have both taken independent legal advice and the general plan for the division of assets has been agreed. Essentially, Angela has said that she needs a nice house on or very near to the estate and sufficient assets to produce a decent income for her to live relatively comfortably for the rest of her life. Angela does not want to create a situation where core parts of the Summerton Estate have to be sold to fund this, as she is hopeful that the estate, which has brought her a great deal of happiness, will remain intact for her and Ted’s heirs.


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General tax rules and divorce

The first thing to note is that married couples living together (and people in civil partnerships) have the benefit of some very significant tax reliefs. They can transfer assets between each other without any capital gains tax or inheritance tax consequences, ie both transfers are exempt for these taxes. If similar gifts or transfers were made between unmarried but cohabiting partners there would be an immediate capital gains tax event and possibly inheritance tax if a death occurred within seven years of the gift (subject to other possible reliefs).

Clearly, after divorcing, Ted and Angela would no longer be married and therefore if assets are going to be transferred between the two they should be done before capital gains tax and inheritance tax become an issue. The capital gains tax rules have a further kink to consider, which is that the exemption between spouses or civil partners only applies for the year of separation.

Capital gains tax rules and separation

At present, Ted and Angela are still living together in Summerton Manor, although Angela is occasionally spending some time seeing friends in London where Ted and Angela own a small apartment. They are still sharing the private apartment within Summerton Manor.

The tax year in which Ted and Angela separate will be dictated by when there is either a court order, a deed of separation, or where as a matter of fact the separation is likely to be permanent. Our advice is that they should ensure, as far as possible, that the separation occurs as close as possible to the start of a new tax year, ie 6 April.

This will mean that they have as much of a full year as possible to transfer assets without crystallising a capital gains tax liability. The actual timing of the effective date of transferring the assets for capital gains tax purposes should not be overlooked, but that is beyond the scope of this article.

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Final division of assets

Ted’s principle assets are land and property-based, although he does have a reasonable investment portfolio, largely made up of ISAs that he has religiously funded over the years.

After a very busy 12 months, they decide that a nice four-bedroom house on the edge of the estate will be Angela’s new home.

Ted also transfers his half share in the London flat to Angela as he very rarely ever used the flat anyway so didn’t feel he would miss it. Angela has agreed to let the flat to supplement her income.

Ted agrees that some of the let non-core residential properties that were likely to be sold would be given to Angela for her to sell. They had put one of them on the market to sell, as co-owners, in order to maximise the use of both capital gains tax annual exemptions, but the sale fell through so a last minute transfer of Ted’s half share had to be made. In the meantime, Angela will let the properties.

Ted agrees to transfer half of his investment portfolio to Angela, which together with the London flat will provide three-quarters of her income requirement.

Ted and Angela agree that rather than entering into maintenance payments, Ted would borrow against the estate and give cash to Angela for her to invest appropriately. We advise that it should be possible to arrange the lending in a tax efficient way, so that tax relief is achieved on the borrowing, although following changes in Finance Act 2016, tax relief will likely, at least in small part, be limited to basic rate relief by 2020.

What if these transfers were made after the year of separation?

As noted above, an outright transfer between spouses who are not living together after the year of separation would crystallise capital gains tax. Most of Ted’s assets have a base cost from the early 1980s so the capital gains tax on the properties would have been substantial and gifts into trust may have to be considered so that the tax could be held over. Although this, in itself, means there could be an immediate inheritance tax charge if the value exceeded £325,000 (Ted’s available nil rate band).

The London flat had been elected as Ted and Angela’s main residence for capital gains tax purposes, because Summerton Manor was never going to be sold, so provided the transfer was made within 18 months of the date of separation there should be no capital gains tax liability arising.

Other tax considerations

Following their divorce, both Ted and Angela will need to amend their wills because a divorce does not nullify an existing will (unlike a marriage). Ted’s remaining assets are a mixture of assets that should qualify for inheritance tax relief, but there is an issue that there may still be too much let property, which would be exposed to inheritance tax.

Ted’s will currently bequeaths any non-inheritance tax friendly property to Angela on a life interest trust, which would have been spouse exempt. The plan was, after ensuring Angela had sufficient income, for Angela to gift on the property to the children very shortly after Ted’s death and therefore (assuming she lived for a further seven years) mitigate both capital gains tax and inheritance tax consequences.

Clearly, this plan can no longer be utilised and so the next project for the family’s tax advisers and solicitor is to discuss alternative strategies.

We will update readers in our next instalment in 12 months’ time.


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Our landed estates team

Our landed estates partners are supported by

a national team of over 80 staff who have the

specialist knowledge and experience to deal

with the challenges faced by our rural clients.

Liz Brierley Head of Landed Estates Bournemouth

Tim Adams London

Sally Appleton Harrogate

Andrew Arnott London

Karen Bartlett High Wycombe

Matthew Burton London

Richard Cartwright Bristol

David Chismon Bournemouth

Stephen Collins Peterborough

Max Floydd Edinburgh

Tim Gregory London

Peter Harker London

Mark Hill Bristol

Mike Hodges Manchester

Jane Hill Peterborough

Coll Murchison- MacDonald Inverness

Alison Robinson Harrogate

Alex Simmons Bournemouth

Susie Swift Inverness

James Sykes London

Jamie Younger Edinburgh

Our specialists

Adam Kay Stamp Duty Land Tax London

Mick Downs Heritage assets London

Shirley Mathieson Renewable energy Inverness

David McGeachy VAT London

Robert Woodward Employee benefits and PAYE London

Saffery Champness’ Landed Estates Annual Review 2017 is published on a general basis for information only and no liability is accepted for errors of fact or opinion it may contain. Professional advice should always be obtained before applying the information to particular circumstances. J6617. © Saffery Champness LLP April 2017. Saffery Champness LLP is a limited liability partnership registered in England and Wales under number OC415438 with its registered office at 71 Queen Victoria Street, London EC4V 4BE. The term “partner” is used to refer to a member of Saffery Champness LLP. Saffery Champness LLP is regulated for a range of investment business activities by the Institute of Chartered Accountants in England and Wales. Saffery Champness LLP is a member of Nexia International, a worldwide network of independent accounting and consulting firms.

www.saffery.com

Our offices

Bournemouth Liz Brierley Midland House, 2 Poole Road, Bournemouth BH2 5QY +44 (0)1202 204744

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Documents

Landed Estates Annual Review 2017/media/Files/S/Saffery-Champness/docum… · pounds of conservation support becoming increasingly hard to secure. However, 80%-90% of farm output