Good Governance in Farming businesses

Post-Brexit, it’s now even more important for farming families to understand how changes to direct payments and valuation of farmland can affect succession, asset protection and family disputes. We explain what you need to know.

Leaving the EU resulted in the UK leaving the EU’s Common Agricultural Policy (CAP), which paid farmers direct payments and has been a significant source of income for many farmers. Following Brexit, the financial support for farmers is largely contained in The Agriculture Act 2020 (the Act). The Act sets out measures to increase transparency and fairness in the supply chain for farmers and food producers. However, there is little sign of the bonfire of red tape that Brexit was supposed to provide.

Farming is changing

Direct payments are currently based on how much land is farmed; these payments will be phased out over the next seven years and there is no certainty as to how payments will be allocated in the future. Every farmer will have a reduction of 5% on their first £30,000 of direct payments in 2021, with bigger reductions on higher payment bands. These bands will work like income tax bands, with a 25% reduction on the top payment band of more than £150,000.

Environmental land management (ELM) schemes have been introduced to pay farmers for producing public goods such as environmental and animal welfare improvements and delivering public benefits such as air and water quality, public access and productivity. Farmers will have the opportunity to access new schemes as their receipts under direct payment fall, and grants are to be offered to help farmers in environmental and productivity improvements. In 2022, an exit scheme will be offered to help farmers who wish to retire with the opportunity to take a lump sum in place of any basic payment or delinked payments. The Department for Environment Food and Rural Affairs (DEFRA) continues to work with farming organisations, landowners and new farmers to design appropriate schemes to provide opportunities for new farmers to overcome existing barriers to starting a new farm business.

Domestically, reaching our net zero target is one of this government’s top priorities, which requires changes in land management to reduce agricultural greenhouse gases. 26 January 2021 marked the first day of the reporting stage of the Environmental Bill 2019-21 (the Bill), which provides for targets, plans and policies to improve the natural environment.  The Bill will help deliver the government’s manifesto commitment to delivering the most ambitious environmental programme of any country on earth. The use of conservation covenants to deliver biodiversity net gain beyond the planning context may bind successor landowners, and impact contract farming agreements.

Issues to consider

• Farmland values may well be affected, given the significant emphasis towards environmental factors in future payments. Land previously considered of lower value, may now be repurposed to meet agricultural aims. Public footpaths running through land may be seen less as a nuisance but instead as a source of income.
• Business valuation will need to take account of the seven-year phase out of direct payments.
• Diversification may pose challenges for farm businesses due to the emphasis on conservation and environment. Public access may attract increased support.
• Trading accounts may provide insufficient indication as to the future performance, particularly if the business was supported by CAP.
• Will land under a conservation covenant still be an asset for trading purposes in order to qualify for business property relief (BPR)?
• Will land under conservation covenants maintain an agricultural status for agricultural property relief (APR), and if so, will the additional value due to biodiversity be included in the agricultural value?
• Financial impact of the COVID-19 pandemic, proposed changes to inheritance tax (IHT), capital gains tax (CGT) and the recent Wealth Tax Commission’s report on wealth tax are likely to attract the attention of policymakers.

Land agents and agricultural experts have been considering the impact of these issues carefully and it is important to have an expert assessment.

Typically, there are uncomfortable truths around succession concerning family farming businesses

• Farmers are often asset rich and cash poor.
• Succession of the farm frequently causes anxiety and distress together with perceived inequality when assets cannot be split.
• Interactions regarding succession have previously been difficult conversations.
• The responsibility that farmers feel, knowing the hard work of previous generations and their commitment to the future.

Divorce and other disputes within families can have a ruinous effect on a farming business, sometimes resulting in a sale of all or part of the business. These factors make proper planning essential. Farms are often inherited and may be held within a company structure, partnership, or subject to trust structures in order to protect the underlying assets.

Whatever the structure, good governance is essential.

Good governance

Good governance will alleviate potential disagreements on sale or transfer of assets, both on separation and on death. Particular consideration should be given to the following:

• A carefully worded pre-nuptial agreement will avoid the uncertainty, cost, time and stress of litigating about the matrimonial finances. Even if a couple didn’t sign a pre-nuptial agreement, it is possible to provide certainty and protection at any time after the marriage through a post-nuptial agreement. This is particularly useful if there are significant changes to the farming business.
• Land ownership and trusts; ensure properly documented, constituted and registered.
• Suitable structure adopted for the business, with carefully drafted trust documentation, articles, partnership or shareholder agreements (as appropriate.)
• Disaster recovery plan if the business owner lost capacity though the preparation of finance and property lasting powers of attorney (LPA), specific to the continuity of the business in addition to personal assets, health and welfare.
• Discuss succession plans at the appropriate time with advisors and the individuals who are to succeed in the business.
• Understand the value of your estate and exposure to inheritance tax (IHT) on lifetime transfers and on death, taking expert advice.
• Control how your business will pass on death; make a will which will maximise APR and BPR, supported by a letter of wishes expressing how you would like your trustees to administer your estate.

Plan to succeed

History is littered with agricultural families, some asset rich and cash poor, who have failed to protect assets and make adequate provision for succession or family disputes. The fallout is painful -both emotionally and financially - often resulting in irretrievable family division. The pandemic, coupled with the biggest change in agricultural policy in half a century, is now driving intergenerational conversations to the fore.