Farm business structures for the future

All farm businesses are going to have to consider what will happen when the payment system changes – firstly reducing the BPS and then transitioning into ELMS. However, the Government’s consultation in May this year was specifically about lump sum and delinking of payments. The background to that is about how farms and farm businesses are to move into the future and particularly how they may be passed on to the next generation.

When considering how that might happen, it is imperative to fully analyse the situation; as it is now and where it wants to go in future. There are often many incorrect assumptions about both, and everyone involved should consider the following:

Who owns what land and is it in a partnership or not?

As well as understanding exactly what each person has, land in partnerships is taxed differently to non-partnership land. Note that partnership accounts are not always legally conclusive as to whether land is a partnership asset or not.

Who holds any tenancies and how old those tenancies are?

Tenancies before 12 July 1984 often have a right for the tenant to pass them down to the next generation. That is not only on death but ‘retirement’ which the Agriculture Act 2020 has just made available to farmers of any age.

What other assets there are, who owns them and how?

Often these are partnership assets and it is important to look at partnership agreements to see how assets are owned. Usually, if all partners are in agreement, then most re-structuring can be easily achieved (subject to tax considerations) as partnerships are just agreements between individuals – they are not separate entities in themselves. If some partners do not agree, then it will be important to know what any partnership agreement says should happen.

What does everyone actually want and how is that funded within what there is?

There is a need for honest conversations. We find that older generations are worried about being fair to younger ones, who have different ideas. Commonly the solution is to split the land as a major asset from the trading business – so that the next generation can continue the farming, whilst the assets are held by them jointly. That can be with all of them in partnership or renting land back into the trading business.

What about other financial implications?

For example, Agricultural Property Relief from inheritance tax (IHT) is helpful whenever farmland is transferred especially as relief is frequently on the full agricultural value, although it can be limited to 50% in certain circumstances. But care is needed with such relief where land is held outside a partnership or where land is subject to tenancies beginning before September 1995 and a considerable amount of our work is documenting arrangements to safeguard it. We also advise on Stamp duty land tax (SDLT) which can apply to transfers of farmland and buildings, including farmhouses.

Careful structuring may allow property to be moved between generations without any SDLT being paid, particularly where there is a partnership in place or there is no debt on the land. Capital gains tax (CGT) reliefs are also frequently available and liaison with accountants is essential.

Commonly partnerships are used to put together agreements between people as to how they will deal with businesses. Alternatively, assets can be split by partition. Lastly, we can also limit liability - mostly in companies and limited liability partnerships, or by renting land between parties. With a clear idea of these points, we can then look at how the needs can be met - most things are possible.