The image of an aged farmer struggling to cope with the demands of running a farm – either on his own or perhaps with a similarly ageing partner – will be familiar to anyone with involvement in the rural sector.
Part of the issue is that farmers tend not to “retire” in the sense that many in the non-rural world understand it. Whilst a farmer may reduce their workload over a series of years, more often than not this is the result of physical capability rather than attaining a particular age.
For those with relatives who are interested in the farming enterprise, given sufficient time and professional advice, ageing farmers can arrange for an orderly succession to the farming business, secure the business for future generations as well as securing their income in retirement.
However, for those without an immediately apparent succession plan for the succession of the business, what can a farmer do to provide an income into retirement and preserve the value of his assets for the next generation?
First, perhaps there needs to be an acknowledgement that “struggling on” is not a long-term solution: animal welfare issues aside, being the subject of such judicial sanctions such as those in the Exelby case can have a ruinous effect on the farming business and will dramatically reduce the options available for future proofing the business.
Two options – selling the land and leasing the land – will be familiar routes to exiting the farming business but are often terminal for the farming business, and tax considerations may make these routes particularly unattractive.
Two other options worth considering – especially where there is a desire to keep the farming business as a going concern for one reason or another – are contract farming and share farming arrangements.
Contract farming arrangements involve the farmer engaging a contractor to carry out various (usually labour intensive) activities. Often the Contractor will be paid periodically for the labour and machinery used on the farm, with the profits arising from the sale of produce being shared between the Farmer and Contractor according to a pre-agreed ratio. In this way, whilst the Farmer may not have a guaranteed income, the Contractor should feel incentivised to provide a high level of service, better quality produce and therefore a better sale price. If these arrangements are entered into in order to take advantage of the various tax reliefs associated with farming “in-hand”, it is important that professional advice is sought on the terms of the agreement in order to assess the likelihood that tax reliefs will be available. Many of the standard form contract farming agreements that we see are not suitable for APR and BPR, for example.
Share farming arrangements are in essence a collaboration of two or more businesses and the fundamentals will be familiar to any farmer who has farmed as part of a partnership. Share farming arrangements however tend to lack the familial element that many farming partnerships possess, and each share farmer maintains its own business and has more freedom than is often associated with a farming partnership. The agreement should set out each farmer’s responsibilities (especially on the costs of the farming activities) and how the profits should be divided. Share farming agreements are often annually-renewed agreements, giving each party an opportunity to freely negotiate the share of the profits for the next year. Commonly they require a more “hands-on” approach for both parties to the agreement as well as ongoing commercial and relationship management.
Above all, one should remember that these arrangements are all means to an end, and therefore it is imperative that professional advice is first sought in order to identify what the intended outcome is whilst also taking into account all relevant considerations such as: taxation, appetite for risk and wider succession planning.
For more information please contact Jonathan Croley, Associate in the Construction & Infrastructure Team at Ashfords LLP, on firstname.lastname@example.org or call 01392 334109.