To the overseas buyer looking to acquire agricultural land in the US, a knowledge and understanding of the restrictions and policy on foreign ownership is crucial.

In addition, as the interest in overseas ownership of agricultural land increases, the rules can and do change. Lobbying from local communities or a new government policy can lead to a change in the regulations relating to purchasing and impact on the exit strategy of any investment. This is very unlikely in the US.

Indeed, there is very little to no political risk in terms of investment in the US. The most prevalent issue for investment into farmland here is title rights but the risk is reduced by the ability to purchase title insurance upon purchase of land.

The US has more than adequate access to country credit, policy transparency, fair taxation and loan accessibility. However, US fiscal policy is state-based and some states have better fiscal policies than others.

Farmland has always been a relatively illiquid asset when compared to commercial or residential property markets. As in the UK, the US agricultural and farmland markets are generally highly accessible and transparent with good access to trade organisations and market information.

Currently relatively little US farmland is held in direct overseas ownership and, in 2012, this accounted for just 1.15% of all farmland across the US. The largest proportion of overseas ownership is concentrated in Maine. Table 1 shows the proportion of farmland in each state under overseas ownership.

click image below to enlarge

^{Source: USDA, Savills Research}

In contrast to the UK where there are no restrictions on Foreign Direct Investment (FDI), there are some states and provinces in the US where overseas ownership is restricted. US subsidies are not available to overseas individuals and entities. In addition, the Agricultural Foreign Investment Disclosure Act requires the disclosure to the Secretary of Agriculture of farmland purchased by overseas buyers in the United States.

These restrictions should not deter investors who wish to purchase farmland in the US. There are opportunities in the key agricultural regions for both the private and institutional investor.

Planning ahead: What you need to know

An investment in the US requires consideration of UK and US taxation and reporting obligations. Investing in the US might seem potentially perilous, with its patchwork of federal, state and local tax and regulatory regimes that can vary widely in scope and effect. But this minefield can be successfully navigated with a bit of advance planning. Investment in US farmland can be efficiently structured to preserve the UK tax advantages of investment in farmland while allowing investors access to the US market.

■ Like the UK, the US imposes an estate tax on persons holding US assets at death. This tax applies to US assets with a value in excess of a mere $60,000 threshold, at a rate of 40%. Some US states also impose their own state level estate tax, though at much lower rates (with a typical maximum of 16%). Unlike the UK, there is no relief for business or agricultural property.

■ Therefore, a key consideration for UK domiciliaries investing in US farmland will be to structure their investment to restrict taxes on death to those payable in the UK and US. The most attractive method is to invest via a corporate structure, which may block the attribution of estate tax to any particular person. Alternative ownership structures include trusts or partnership, which are commonly used in the US, but may not be as tax-efficient to the generational investor.

■ Care also needs to be taken when considering the US income tax (which also applies to capital gains) implications of an investment. Investments through non-corporate entities (that is, investments by individuals and by trusts) are taxed at a maximum federal rate of 39.6% for ‘ordinary’ income (which includes business operating income) and 20% for so-called long-term capital gain.

■ Investments by corporate entities are subject to a maximum 35% tax rate at the corporate level (with no preferential tax rate for long-term capital gain), plus potentially an additional 30% tax at the shareholder level. There may also be state level income tax.

■ However, UK investors are particularly well placed to make investments in the US through corporate entities because the UK has both a favourable income tax treaty and a favourable estate and gift tax treaty with the US. These treaties can reduce the 30% shareholder level tax to as low as 5% and can block imposition of US estate tax. Credit can also be given for the US tax suffered against any UK liability.

■ As an added attraction, hold over relief on the reinvestment of the sale proceeds of UK farmland can apply to purchases of US farmland, as there is no geographical restriction to this relief.

^{Words: Bertie Hoskyns-Abrahall, Withersworldwide}