Sometimes succession isn’t as straightforward as handing over a farm to the next generation.
The final part of Farmers Weekly’s Let’s Talk Succession series considers alternative arrangements such as tenancies, share farming and joint ventures.
Succession planning is difficult enough for landowners with children keen to take over the farm. But what if you don’t have a suitable successor, you don’t own the farm, or the business can’t support the required number of people?
Few problems are insurmountable, and there are plenty of options that farmers can explore to find the right solution, as Tony Evans, partner at the Andersons Centre, has discovered.
See also: Read our succession planning academy
“Joint ventures have become more popular over the past 20-30 years,” he says. “Farmers who do not wish to fully retire are looking to alternative methods to stay involved in agriculture without their contribution being so physically demanding. Joint ventures offer a continuation of business trading while also allowing a semi-retirement from daily activities.”
One in four farmers say they can’t afford to retire, according to a Farmers Weekly survey conducted in partnership with NFU Mutual. About one in three businesses can support only a single successor, and 16% of respondents claim the successor does not have the necessary skills or experience.
Joint ventures can help in every case, enabling businesses to grow by marrying different skills and resources, bringing in young enthusiasm tempered by mature wisdom. However, it’s essential that farmers find the right prospective partner and structure the agreement carefully to avoid potential tax pitfalls.
There are three main types of joint venture: an equity partnership, whereby the different parties inject their own capital to co-own the business; contract farming, where the owner retains overall control and pays the contractor to carry out the work; and share farming, in which typically the landowner supplies the assets and the operator provides some working capital and labour.
The profit share and full details vary between agreements, so it’s possible to produce a tailor-made contract to suit both parties.
The appropriate structure will depend on each party’s long-term goals, says David Chismon, a director in the landed estates group at accountant Saffery Champness. It’s also important to have one eye on the impact each structure has on Inheritance Tax relief.
In the case of share farming, both sides are actively farming so the assets will remain eligible for agricultural property relief (APR) and business property relief (BPR). With a contract farming agreement, the landowner must be in control and taking the financial risk to qualify for tax relief – although the contractor may take a share of the profits.
“In both cases, if you’re living in the farmhouse you must be using it for agricultural purposes, otherwise it may not qualify for APR. And HMRC will always look at what’s happening on the ground, not just the paper contract, so you really must be working collaboratively, says Mr Chismon.
Another option for a retiring farmer may be to let the land out on a farm business tenancy. This provides a regular income, but carries considerable tax risks. “If you let the land for seven years it should qualify for APR on the agricultural value.” However, it won’t qualify for BPR on any ‘hope’ value above this, which could lead to a hefty tax bill on death, he adds.
One key point is that farmers who rent out all their land on a farm business tenancy and stay in the farmhouse will lose their agricultural property relief, warns Sean McCann, chartered financial planner at NFU Mutual.
“The house will then be included in your estate for Inheritance tax purposes. However, there are other options that can preserve any relief, so getting the right advice is vital.”
Whichever joint venture you opt for, finding the right partner and drawing up a stringent legal framework is essential. Land agents and levy boards may be able to help identify suitable partners and provide template agreements, although input from agricultural lawyers and accountants should also be sought.
When it comes to the tenanted sector, people with succession tenancies have to plan well ahead to ensure the handover is successful, says George Dunn, chief executive of the Tenant Farmers Association.
“They are constrained by the legislation. The successor has to meet eligibility criteria, which can be difficult, particularly on smaller farms.”
There are four aspects to this test: Successors have to be close relatives to the tenant, meaning a spouse or civil partner, child or sibling. It’s not possible to skip a generation and pass directly to a grandchild, and most tenancies are subject to a maximum of two successions.
The successor must also have suitable training or experience to take on the farm, and must not be in occupation of another commercial unit ( a farm providing sufficient income for two hired men). The final test is that they must have made at least 50% of their livelihood from the farm in question for five of the previous seven years before succession.
“This is often the most difficult rule to comply with, as your partner’s income is also taken into account, as is any income you make elsewhere,” says Mr Dunn.
“If you or your partner are making significant money elsewhere you should use that for pensions, savings and investments – including investing back into the farm – and use income from the farm to pay for all your day-to-day expenses.”
To maximise the chances of succession, tenants should plan ahead to choose an appropriate successor – and an alternative one in case the first choice is unavailable when the time comes, he adds.
“If you have more than one potential successor you need to decide who is best to take on the farm and most likely to meet the criteria,” he says. “They should be written into your will – and be prepared for the landlord to challenge the succession: You need to have all your ducks in a row.”
Tenants who can plan ahead sufficiently can usually create the required framework – bringing the successor in to work on the farm either full- or part-time. But problems often arise upon the unexpected death of a tenant, warns Mr Dunn.
“In these cases, the tribunal will allow some flexibility where the successor doesn’t pass the livelihood test – but if they earn less than 40% of their livelihood from the farm they will struggle.”
While succession can be negotiated outside these criteria, any succession application that goes before a tribunal would be subject to the four tests.
If there isn’t an ideal successor, landlords will sometimes grant a joint tenancy for father and son to farm together, for example. And where there is no successor at all, it may be possible to set up a contract farming agreement, although most tenancies preclude sub-letting or share farming, he adds.
“It’s important to realise that there is a big difference between who is the tenant and who is running the business. Tenants often leave the actual handover of the tenancy until death, but I’m very much in favour of passing on the business itself in good time.”
Housing can be another difficulty, as most agreements require the tenant to live in the principal farmhouse. “You may be able to negotiate a house swap with the younger generation.
The important thing is to keep up-to-date with the latest legal advice as tribunal decisions are altering the framework all the time.”
Case study: Joint venture brings mutual benefits
John Carr (pictured) milks 150 spring-calving dairy cows at Cleveley House, Forton, Lancashire, and recently decided to set up a joint venture with a younger farmer.
“I’m 52 so am not looking to retire, but I want to look out for other opportunities,” he says. “I have a country store and café as well, so don’t want to be tied to milking twice a day forever.”
When his self-employed relief milker retired, Mr Carr decided to bring in a farmer’s son on a contract farming basis. “I like to work with younger people because they’re so enthusiastic and ambitious. It’s also good to help them build a track record and experience, so they can move on to something bigger.”
The contractor provides the power and labour, with an agreed monthly fee for costs, basic wage and accommodation. Mr Carr gets a 10% return on capital invested, plus a notional rent for the farm. Any profits left over at the end of the year are split 70:30 in favour of the contractor.
“Recently the young man I’ve been working with got an opportunity to take on a tenancy with his father, so I’m on the look-out for someone new,” he adds.
“My son John is currently working for an agricultural supplies firm, and he may be interested. He doesn’t want to be my employee – being part of a joint venture would give him, or whoever I do end up working with, the independence to make their own decisions.”
Mr Carr says it’s important to interview prospective candidates, and have a trial period working together before signing on the dotted line. He holds weekly meetings with his contractor to discuss general farming policy and aims, and then leaves them to make the day-to-day decisions.
“There may be an opportunity to take on some more land and set up a second herd, which the contractor could perhaps invest in, too. I’ve got the capital and experience to approach a bank for a loan, and we’ve got a simple, grazing-based system that’s easy to replicate,” he adds.
“That way I could bring in a second contractor back at home. If the figures stack up there are some great opportunities out there.”
Succession planning is often a difficult issue for farmers.
It can be quite a daunting topic to raise with family members, whether it’s because of the emotional issues that come with retirement or how to pass on a farm fairly to siblings.
NFU Mutual believes it’s important to start having conversations now involving all members of the family who are involved with the farm and to seek expert advice on the financial implications of the options open to them.