Thinking of buying a farm this summer? Category: Agriculture - Posted On: Jun 26 2018 In this article, our partner, Mark Wilken looks at some of the issues to consider before making an offer. Early summer is when most farms are looking their best. It is therefore no surprise that farms for sale normally come to market at this time of year, with agents aiming to seduce prospective buyers with glossy sales brochures. The decision to make an offer can often be driven as much by emotion as by economics. For some the opportunity to purchase the adjoining farm may be viewed as a “once in a lifetime opportunity”, with the finances being of secondary consideration. Others may regard a purchase in a more objective light, seeing it as an opportunity to grow the business and ultimately improve profitability. Whatever your motives, before progressing with an offer potential buyers need to consider the points highlighted below. IssueConsideration FinanceTop of the list will be how you are going to fund the purchase. Unless you have a substantial existing cash balance any new farm purchase will have to be funded by debt. Most lenders will only lend up to 60% of the value of a property, so if wholly reliant on debt your existing farm will also need to be pledged as security. As well as sufficient security, most lenders will be looking for a track record of profitability to provide additional comfort for any lending. ServiceabilityCan you afford to pay the interest and capital repayments on any new loans? With interest rates at current low levels paying the interest may be manageable, but when capital repayments are added the cash costs of servicing can increase significantly. For example, at a purchase cost of £7,000/acre and an interest rate of 3%, the annual interest cost would be £210/acre. However if the loan is to be repaid over 25 years at the same interest rate, then the annual cost to cover capital and interest payments jumps to £402/acre. There is also no guarantee that interest rates will remain at current levels over the medium to longer term. Taking at least a proportion of the debt on fixed rate finance may therefore be appropriate. Transaction CostsDon’t forget about Land and Building Transaction Tax (LBTT), loan arrangement fees and legal costs which can easily add an extra 6-7% to the offer price. Economies of ScaleOften the rational for a farm purchase is to spread fixed costs and improve profitability. This may well be the case if you currently have excess labour and machinery, but this argument only really works for small acquisitions as any significant purchase is likely to entail additional recruitment and further investment in plant and machinery. With extra acres to work there will also be marginal increases in fuel and machinery repair costs on top of the increased interest cost. With combinable crops producing a gross margin of £300-400/acre before support payments any increase in profitability is likely to be marginal if the purchase is wholly financed on borrowed money. Tax IssuesSome purchases may be tax motivated. Farmland is sheltered from inheritance tax after just two years of ownership and gains from other land sales can be rolled into a new purchase, thereby avoiding capital gains tax. Is it a good environment?Ultimately only time will tell whether the purchase proves to be a good investment, in any case if there is never any intention of selling the question may be irrelevant. Factors influencing land prices include sector profitability, interest rates, tax reliefs and subsidy payments. With support from the last three factors likely to weaken any future increases in land values will have to come from improved profitability from actual farming. Buying an additional farm is a big decision, with many factors to consider. Getting it wrong could easily jeopardise the viability of the business. The above points are by no means a complete list of all the factors to be taken into account and if you would like to discuss the full financial implications of a potential farm purchase then please speak with your normal EQ contact. Mark Wilken is a partner based in our Cupar office. He can be contacted on 01334 654044 or at mark.wilken@eqaccountants.co.uk. All News View the latest news stories from all of our sectors. View All News News by category View the latest news stories from a specific sector. COVID-19 EQ News People Experienced Professional Graduate Intern RGU Placement School & College Leaver Services Audit & Reporting Corporate Finance EQ Accounting Bookkeeping Cloud Accounting Management Accounts Payroll Taxation International Tax Making Tax Digital Personal Tax Specialisms Agriculture Charities Engineering & Manufacturing Healthcare Leisure Food & Drink Professions Property & Construction Technology
Thinking of buying a farm this summer? Category: Agriculture - Posted On: Jun 26 2018 In this article, our partner, Mark Wilken looks at some of the issues to consider before making an offer. Early summer is when most farms are looking their best. It is therefore no surprise that farms for sale normally come to market at this time of year, with agents aiming to seduce prospective buyers with glossy sales brochures. The decision to make an offer can often be driven as much by emotion as by economics. For some the opportunity to purchase the adjoining farm may be viewed as a “once in a lifetime opportunity”, with the finances being of secondary consideration. Others may regard a purchase in a more objective light, seeing it as an opportunity to grow the business and ultimately improve profitability. Whatever your motives, before progressing with an offer potential buyers need to consider the points highlighted below. IssueConsideration FinanceTop of the list will be how you are going to fund the purchase. Unless you have a substantial existing cash balance any new farm purchase will have to be funded by debt. Most lenders will only lend up to 60% of the value of a property, so if wholly reliant on debt your existing farm will also need to be pledged as security. As well as sufficient security, most lenders will be looking for a track record of profitability to provide additional comfort for any lending. ServiceabilityCan you afford to pay the interest and capital repayments on any new loans? With interest rates at current low levels paying the interest may be manageable, but when capital repayments are added the cash costs of servicing can increase significantly. For example, at a purchase cost of £7,000/acre and an interest rate of 3%, the annual interest cost would be £210/acre. However if the loan is to be repaid over 25 years at the same interest rate, then the annual cost to cover capital and interest payments jumps to £402/acre. There is also no guarantee that interest rates will remain at current levels over the medium to longer term. Taking at least a proportion of the debt on fixed rate finance may therefore be appropriate. Transaction CostsDon’t forget about Land and Building Transaction Tax (LBTT), loan arrangement fees and legal costs which can easily add an extra 6-7% to the offer price. Economies of ScaleOften the rational for a farm purchase is to spread fixed costs and improve profitability. This may well be the case if you currently have excess labour and machinery, but this argument only really works for small acquisitions as any significant purchase is likely to entail additional recruitment and further investment in plant and machinery. With extra acres to work there will also be marginal increases in fuel and machinery repair costs on top of the increased interest cost. With combinable crops producing a gross margin of £300-400/acre before support payments any increase in profitability is likely to be marginal if the purchase is wholly financed on borrowed money. Tax IssuesSome purchases may be tax motivated. Farmland is sheltered from inheritance tax after just two years of ownership and gains from other land sales can be rolled into a new purchase, thereby avoiding capital gains tax. Is it a good environment?Ultimately only time will tell whether the purchase proves to be a good investment, in any case if there is never any intention of selling the question may be irrelevant. Factors influencing land prices include sector profitability, interest rates, tax reliefs and subsidy payments. With support from the last three factors likely to weaken any future increases in land values will have to come from improved profitability from actual farming. Buying an additional farm is a big decision, with many factors to consider. Getting it wrong could easily jeopardise the viability of the business. The above points are by no means a complete list of all the factors to be taken into account and if you would like to discuss the full financial implications of a potential farm purchase then please speak with your normal EQ contact. Mark Wilken is a partner based in our Cupar office. He can be contacted on 01334 654044 or at mark.wilken@eqaccountants.co.uk. All News View the latest news stories from all of our sectors. View All News News by category View the latest news stories from a specific sector. COVID-19 EQ News People Experienced Professional Graduate Intern RGU Placement School & College Leaver Services Audit & Reporting Corporate Finance EQ Accounting Bookkeeping Cloud Accounting Management Accounts Payroll Taxation International Tax Making Tax Digital Personal Tax Specialisms Agriculture Charities Engineering & Manufacturing Healthcare Leisure Food & Drink Professions Property & Construction Technology