Ask Alice – rural valuation questions answered

We are considering a rewilding project on our estate, but what will be the impact on value and our inheritance tax liability?

Rewilding is a form of environmental conservation which actively encourages ecological restoration and improvements to biodiversity. It forms a key part in the fight against climate change, but it does not have to be carried out on a large scale to have an impact. Landowners and managers must play their part as stewards of the landscape, and many are keen to do so, but optimal land use is the key.

The environmental emphasis and intentions of future government policy and funding are likely to support poorer-quality areas and encourage the utilisation of marginal ground. This is the time to look at marginal land and examine closely the latent value in these areas. There are so many opportunities for alternative uses and potential for income creation away from traditional commercial agriculture.

The availability of such support and the rise of the environmental investor is likely to have a positive impact on value and demand for such marginal land, particularly Grade 4 or poorer-quality Grade 3 land. We anticipate that the introduction of environmental-based payments will increase the income potential of such land, which will be reflected in capital value, too.

Knight Frank has numerous clients looking at rewilding as an option, but this is generally across areas of marginal land that may account for up to 10% of the land holding. As advocates of optimal land use, we believe that rewilding certainly has a place within the farming system, but any change must suit the land and business structure, and you may have to consider the potential tax implications of the scheme if there is a move away from agriculture.

In terms of inheritance tax, the HMRC definition of agricultural property that qualifies for Agricultural Property Relief (APR) does specifically include “land not currently being farmed under the Habitat Scheme” (subsumed into the existing Countryside Stewardship Scheme). With the significant changes to government policy and the environmental drivers, we would hope this will broaden and extend to include land subject to rewilding and biodiversity aims, but, as ever, there are likely to be associated qualifying requirements.

There are yet to be any test cases on this, so unfortunately we cannot assume this is definitive. In the meantime, therefore, it is essential the land forms part of the trading business to qualify for Business Property Relief. Knepp Estate, which featured in last year’s edition of The Rural Report is a pioneering example of a rewilding scheme that continues to trade, producing organic pasture-fed meat and offering wildlife tourism.

We have been thinking about investing in farmland or a rural estate. What are the yields like, and which regions should we be looking at?

The UK is identified by many as a safe option for investment in farmland for several reasons. There is a history of steady growth in values, and with a secure Land Registry title system and (comparatively) stable governments, this adds to the security of the investment.

In addition, agricultural land is (currently) efficient from an inheritance tax perspective. This is an area of much debate, and while such reliefs could remain applicable to those actively using the farming land, the ability to claim APR ought not to be the key investment driver while the position is unclear.

There is certainly still an appetite for investment in agricultural land, principally due to the security of the asset class, the income it generates and the latent value, particularly where there are windfalls from development or changes in tenure.

It is these windfalls that offer the best prospects for capital appreciation. There are numerous opportunities for uplift in value and income potential for marginal land which is unsuited to commercial agriculture. There are multiple opportunities with alternative uses for biodiversity, offsetting, renewables and tree planting, which will benefit from both private and public sector funding.

The limited information we have regarding future Environmental Land Management schemes do seem to favour owner-occupied land, so this must be a key consideration when looking at business structure and the occupation of the land.

When one assesses the market in a broad context, you can buy an estate in the south east (a higher capital value, but also a higher income or income potential) or the north (with a lower capital value, but also a lower income and potential income). The yield will therefore be broadly similar.

Across a diverse estate, the market rate in performance could be between 1% and 2% yield (the gross income divided by acquisition price or capital value). In relation to other asset classes this is therefore typically very low yielding, which is mitigated by the provision of a safe haven and help in balancing the investor’s portfolio. With broadly similar yields, the location will likely be determined by supply.

It is important to establish what balance of assets you are looking for, what you want to achieve from the purchase, and keep in mind the importance of a trading entity in relation to income and capital tax liability.

Are there any other environmental or climate change issues I need to be aware of when buying rural property?

These are two topics that are now coming to the forefront of many conversations that you need to be aware of and to be ready to act upon.

1. Energy efficiency regulations

The drive for energy-efficient housing stock will be key to achieving net zero, and this is likely to hit the private rented sector hardest, as it is already illegal to let a property with an F or G Energy Performance Certificate (EPC) rating without an exemption certificate. There are proposals to extend this to properties with a D or E EPC rating from April 2025.

Some lenders are already unwilling to lend on investment properties with F or G ratings, which will only increase as banks pursue their own environmental social and governance agendas.

From April 2023, the Minimum Energy Efficiency Standard will be extended to cover all leases, including where a lease is already in place. The maximum expenditure a landlord must invest to obtain an exemption certificate (which lasts five years) is currently only £3,500, although this is anticipated to rise to £10,000 in 2025.

2. Slurry and silage requirements

Emissions and water quality are also a key focus, with Wales already having introduced stiff regulations and the remaining devolved governments likely to follow. Alongside the Agricultural Transition Plan for England, Defra has now issued its Financial Assistance Plan as part of the Agriculture Act 2020. These include the Farming Investment

Fund and the Slurry Investment Scheme, currently proposed for autumn 2022. Applications for funding are generally available in very small windows, so awareness of the schemes and proposed timings is key.