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Why this man chose farms over funds

Investors, such as fund manager Graham Birch, are being drawn to agriculture by the increasing demand for food… and the tax breaks.

(Source: www.timesonline.co.uk, 31 Jan 2010)

When star fund manager Graham Birch decided to give up running Black Rock’s £1.5 billion Gold & General fund to become a full-time farmer, investors and City-watchers were bemused.

Birch, 49, who had managed the fund for 10 years and was also head of Black Rock’s natural resources team with about £20 billion under management, had returned 22.3% a year for the fund during his tenure, according to figures from Trustnet, the financial website.

Everyone assumed that his move to the countryside was for “lifestyle reasons”, with Tony Stenning, head of UK retail at Black Rock, reported as saying that Birch had been buying farms and “enjoying himself” while on sabbatical.

They were wrong: Birch made the move for the money. In his first interview since leaving Black Rock, Birch explains that he is banking on big returns from his 2,300-acre dairy farm in Dorset.

“I’ve just spent £400,000 on a new grain store — I wouldn’t be doing that if I didn’t think it would be profitable,” he said.

“With any commodity, you need a prolonged period when prices are at, or below, the cost of production for prices to take off — we had that with gold between 1988 and 2001, and we’ve had it with agricultural commodities for an even longer period. We’re due for a period of generally better prices. You need that for people to justify investment.”

His comments come as veteran investor Jim Rogers has proclaimed agriculture as the investment “of the next three decades”, as the world comes to grips with a growing population and food shortages.

The value of UK farmland has already grown 176% in the past decade and 7% in the past year owing to a shortage of supply, according to Knight Frank, the estate agent.

However, it believes values could rise still further. Andrew Shirley at Knight Frank said: “The ongoing imbalance between supply and demand means that prices may well double before the end of the decade. The uncertainty associated with a general election in the first half of 2010 could limit market activity, but we expect average values to climb by a least 5% next year.”

Good quality cereal farmland in East Anglia is about 50% more expensive than farmland in eastern Europe and France, but half the price of land in Ireland and Denmark.

With farming also offering relief against income tax, inheritance tax (IHT) and capital gains tax (CGT), land agents are reporting surging interest from high earners looking for shelter from imminent tax rises.

We look at the pros and cons:

Outlook for prices

Agricultural commodity prices lagged last year’s bull market, dropping by an average 3%, while commodities in general gained 45%, according to the S&P GSCI index. However, experts say rising populations in emerging nations mean food prices will rise.

Hugo Rogers, manager of Thames River’s Water and Agriculture fund, said: “As urbanisation increases in developing nations so does the utilisation of water and food. An increasingly protein-rich diet is the main source of incremental demand. It takes, on average, 4kg of grain to produce 1kg of meat so grain, and by implication water, consumption accelerates.”

Farmland can also provide a good hedge against inflation and sterling weakness as prices for agricultural commodities are in dollars. Crops will therefore be worth more if the dollar is strong against the pound.

However, buying UK farmland may not be the best way to benefit as Britain’s farmers struggle to compete with larger-scale providers across Europe and America. Funds give you international exposure, but you do not benefit from the generous tax breaks on agricultural land.

Tax relief

City buyers are also being attracted by tax relief that allows farm trading losses to be offset against other income.

For example, say you earned £175,000 in 2010-11, while the farm lost £25,000. The loss would reduce your income to £150,000 and cut your tax from £65,020 to £52,520, according to accountant Grant Thornton.

However, you can do this for only five years. After that, the Revenue will deem the farm a “hobby” rather than a genuine concern and you lose the ability to offset losses.

Losses can arise from investing in machinery and the interest on loans. Lifestyle buyers may prefer to invest in shooting ranges, expensive breeds and quad bikes and argue that these are run as a commercial enterprise. The Revenue, however, may see it differently.

Mike Warburton of Grant Thornton, the accountant, said: “Their presumption may be that it’s not a trade.”

Another big benefit is that agricultural land — including cottages, buildings and farmhouses occupied by a full-time farmer — is exempt from IHT after two years.

Farmhouses must be predominantly for farming — in previous court cases, farmhouses have been disqualified after they were deemed “primarily the residence of a rich man”. Another catch is that you have to live in it for two years. If you let it out you can claim only 50% IHT relief.

Firms such as Bidwells, an agribusiness consultant, are helping City buyers take advantage of the tax breaks by sourcing farmland and managing it on behalf of the investor.

Carl Atkin at Bidwells, said: “If you borrow to buy, then you can use interest on the loan against the farm income to produce losses — these can then be offset against other income.

“We ensure the buyer continues to actively participate in the trading decisions so there is an audit trail — this should satisfy the rules.” After two years, the loan can be paid off and the land is eligible for IHT relief.

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