BIM55245 - Farming: tenant right
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 manurial values and sod fertility (see BIM55455)
- tenant's improvements and fixtures
- a deduction for dilapidations.
Such valuations are not acceptable as annual valuations for
Income Tax purposes (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, see ICTA88/S102 (2) and ITTOIA/173(4). In such cases, trading stock held at the date of discontinuance should be valued at the lower of cost or net realisable value).
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 Business
Economics Note 19: 2.5 (reproduced in
BIM55410) and the article on page 63 of
Tax Bulletin, Issue 7 (May 1993).
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 the
Inspector is 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.
