Continuing on the agricultural theme from last time, in this article I consider agricultural land, its cost, its investment potential and its use in inheritance tax planning.
Widely reported figures from Knight Frank show the price of farmland averaged £4,129 per acre in December 2007 - a rise of 25% on the previous year - and property consultants are forecasting growth between 10% and 20% in 2008.
However many are not convinced that these high rises will be sustained, and if, as is being widely predicted, commodity and in particular food prices start to ease in 2009 this could have a knock on effect to land prices.
Upward pressure is being applied to land prices by three main factors
- Non agricultural money such as investors and developers (this accounted for more than half of farm purchases in 2007)
- Demand from overseas buyers. Although UK land has rocketed in price it is still 50% of the price of similar land in Denmark and Ireland.
- Rising commodity prices. Wheat has tripled over the last year, so it is logical that the value of a wheat field should also rise.
Investing in agricultural land
Agricultural land is an acceptable asset for a SIPP (with the usual caveats) and there is no reason why you could not simply buy a plot of land and rent it back to a farmer.
While there is no minimum size, if you are looking at 'bare land' - that is to say land with no farm buildings what so ever - you might be looking at a plot of 50 acres costing £300,000 plus depending upon the location.
The rental income from the plot is likely to be low when compared to other 'property'.
If the idea of holding and managing land does not appeal, or you simply did not want to commit such a large part of a portfolio to this sector then you could look for a collective solution.
Braemar are currently offering subscription to The Braemar UK Agricultural Land Investment Trust or the offshore UK Agricultural Land OEIC. The minimum investment to both is a manageable £10,000 and be aware that the fund is investing in tenanted farm land, not just bare land.
Traditionally farm land has been primarily sought by financial advisers for its inheritance tax benefits rather than its investment potential.
Agricultural relief is available on the agricultural value of the land - that is to say the value of the land if it was available solely for agricultural purposes - and is due at 100% after two years. Full relief is due whether or not you farm the land yourself, however, if the land is leased to another farmer relief only applies after seven years of ownership.
The attraction has been that an unexciting investment (that is to say low volatility) can bring significant IHT benefits. New investors may want to seek advice as to the high level of current valuations - a correction could see much of that IHT saving wiped out.
As with any similar investment liquidity is a significant issue, particularly within collectives (as we are experiencing at the moment with the effective ban on surrender or withdrawal of many commercial property funds).
A run on any fund or syndicate leading to investors withdrawing could lead to depressed valuations being given to exiting investors and, if the fund is allowed, borrowing being used to pay out these investors consequently increasing the risk profile of the investment significantly.
The investment solution might be to find the equivalent exchange traded fund, but as far as I can tell this is one sector in which one currently doesn't exist (for now anyway).
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