Business Clinic: Can farmworker aid semi-retirement plan?
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Here, Edward Beale of Carter Jonas and Andrew Morris of law firm Thrings suggest how a semi-retirement plan on an upland farm could help give a farmworker more involvement in the business.
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Q: We are a couple close to retirement and run an upland sheep farm of 77ha that previously also had a suckler beef herd.
Our children don’t wish to take on the business, but we are considering giving our enthusiastic part-time farmworker the opportunity of a formal joint venture, such as a share farming or other agreement.
He would still need to supplement his income off the farm.
Do you have a rough sense of the minimum size of business needed to make this work and what are our options for a business structure?
What should be included in a business plan and agreement to give clarity and certainty to both parties, for example, the term, review points, how to deal with problems and unforeseen events.
Should we consider adding a Warrendale Wagyu/Blade Farming type calf rearing enterprise?
How do we as the landowning party protect ourselves from losing inheritance tax (IHT) relief eligibility?
Have the proposed IHT changes had an effect on this? What other legal or tax considerations are there?
A: Edward Beale, associate partner, Carter Jonas
The desire to see the land continue to be farmed by someone you know to be enthusiastic and capable is understandable and, if it works well, can be a really good option.
Identify aims
Before you do anything, though, ask yourselves some questions about what it is you want to achieve. This will ultimately steer you towards the right structure.
For some, the goal is to give a younger person a leg up in the industry, to keep the farm running, and to stay lightly involved without the full burden of day-to-day management.
If that’s your aim – and if you’re financially secure enough to do it – it’s a great ambition and definitely achievable.
However, if income is still a major concern, or if you don’t feel ready to give up full control, then a formal joint venture might not be the right fit just yet.
In that case, it might be more appropriate to let the land, or explore a simple employment arrangement with clear roles and expectations.
For a share farming joint venture, the first thing to consider is what this individual is bringing to the table. Is it just labour, or do they have capital, stock, equipment, or specific skills that could underpin a joint venture?
If it’s mainly labour, then you’re not looking at a traditional share farming agreement – you’re more likely looking at a management-style arrangement or perhaps a pathway into a future partnership.
Structure
In terms of how you might structure things, one option is to keep him as an employee, but with a more formal role and more responsibility, perhaps even profit-related bonuses.
Alternatively, you could explore forming a partnership, where he becomes a joint decision-maker and shares in the risks and rewards over time.
Since he would still need to earn money off the farm, it’s important to be realistic about how much time and energy he can put into this venture.
That will affect how day-to-day operations are run and, more broadly, how the relationship is structured.
A clear business plan should spell out the nature and scale of the enterprise you’re planning to run together, who is responsible for what, how much time each person will commit, and whether any capital is being invested by either side.
It’s important to be clear about whether profits will be shared, or whether your worker would receive a regular salary or management fee.
You should also agree on how financial decisions will be made, particularly around stock sales and purchases and any new investment or capital expenditure.
Regular reviews
Share farming agreements need to have a clear term, particularly livestock operations where you’re working on longer cycles.
In most cases, something like a five-year term would be appropriate, with regular opportunities to review how things are going.
Quarterly meetings should examine performance, costs, and future plans, as well as an annual review.
This helps keep things on track and avoids misunderstandings. You’ll also need to be clear from the outset about how to deal with unforeseen events, disputes, or an early exit by either party.
Enterprises such as Warrendale Wagyu or Blade Farming calf-rearing schemes can certainly bring in additional income.
However, I’d strongly suggest taking a close look at what infrastructure you already have and whether it’s really worth investing in upgrades at this stage in your careers.
A: Andrew Morris, partner, private client, Thrings
The starting point will be to check existing eligibility for agricultural property relief (APR) and business property relief (BPR) from inheritance tax (IHT) to ensure that any change proposed to the farming method and structure does not compromise your existing qualification.
APR can provide relief only on the agricultural value of the land and buildings.
More generously, BPR can provide relief on the whole of the market value of the land, buildings and other trading assets.
There are many aspects to eligibility, so detailed consideration is needed to ensure the continued resilience of the business against the risk of tax on death at 40%.
Importance of trading status
In short, to protect IHT relief, the new business arrangement should keep the owner in occupation of the land for the purposes of a trading farm business.
It may well be important that the landowners do not retire, but instead find a way to lighten their workload and share the business opportunity and risk.
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The announcements made in the Autumn 2024 Budget, which are due to fully take effect in April 2026, limit the value of APR and BPR on qualifying farms and farm businesses – any businesses in fact.
The effect of the changes if they come into being as announced, will be that 100% IHT relief for APR and BPR will be limited to the first £1m of qualifying assets per taxpayer, with APR and BPR applying at 50% on the value of the farm and business assets above £1m per taxpayer.
Investment risk
The impact of IHT on death will be relevant in terms of planning for the future for both the landowners and the enthusiastic farmworker.
Assuming the new farm business model will be based at the farm, and the farm worker is keen to invest in the project, it will be a significant risk to that potential investment if there is a prospect that following death of the farm owners, land will have to be sold to pay tax.
The announced changes can be seen as an obstacle to new entrants to farming and new business enterprise.
Consideration must be given to how the new enterprise will operate. There are several options including share-farming, contracting, a partnership or introducing a corporate structure like a limited company.
Each brings its own strengths and issues. Failing to properly plan and document the arrangements in a new enterprise like this can deliver unwelcome consequences, including inadvertent creation of a partnership, compliance failures, uncertainty of business relationships and dispute.
Unwanted tax consequences can follow, for example Stamp Duty Land Tax in partnerships between unconnected parties.
Open approach is key
A resilient business structure is essential if the project has any chance of success.
The landowners need to be open about their plans for succession to the farm, because the prospect of the underlying assets being sold to pay tax or to satisfy the inheritance expectations of the landowners’ family will be unattractive to any investor and would likely dampen the enthusiasm of the farm worker.
A new business structure might explore the involvement of the beneficiaries of the landowners to give the project some prospect of longevity.
Essentially, properly explored and documented arrangements are the key to the way forward, and a collaborative team approach to the issues between the family’s land agent, lawyers and accountants or tax advisers would be the way to progress.
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