Posted on Feb 07, 2017 in Land and Rural Business by Robin Dunlop
The Royal Bank of Scotland last week urged action to aid young farmers to get on the farming ladder.
It is encouraging that a major Bank is trying to raise the awareness of this issue. The problems for aspiring farmers are numerous, but the high value of farmland may well be make an outright purchase unattainable.
The Scottish Government has long recognised the difficulties in the tenanted sector and, after the detailed Review of Agricultural Holdings Legislation (2015), has legislated, within the Land Reform (Scotland) Act 2016, to make certain changes to agricultural tenancies which include provisions to make it easier to pass a tenancy to the next generation. Whether this will help to encourage landowners to make more land available to next generation farm tenants remains to be seen. Certainly, the securing of a tenancy might be the first step on the farming ladder for those who cannot afford to buy land. Even so, the start up costs for a new tenant can be significant and will need the support of specialist agricultural lenders.
However, this legislation does not address other difficulties facing the children of owner-occupier farmers. If you are an owner of a farm and you have a son or daughter who is keen to take over the business, there are many issues to be considered, including:
Succession Planning and Wills. Farmers and landowners in Scotland have, for many years, been free to leave, in their Will, land and buildings to one child. This is under threat from Scottish Government proposals to give all children and the surviving spouse certain rights to share part of the value of land and buildings. It has never been more important for you to take advice on your will and to consider whether gifting part of the farm during your lifetime will achieve their goal of handing it down to the next generation. At the same time it might be worthwhile considering whether the time has come for you to consider signing a Power of Attorney so that the business can continue to operate in the event of your legal incapacity.
Subsidies and Brexit. What will Brexit mean for your farm subsidies which, for certain farms, are already lower than they were? What will this mean for your farm income and will your farm business be able to sustain you and the next generation of your family?
Business Structures. Traditionally, your farm may be owned and run by you and you may have inherited it from your father or, perhaps, another relative. Even if you do not think the time is right to transfer ownership, there is no reason why the ownership of the land could not be separated from your farming business, so that you remain the owner while one or more of your children can increase their stake in the operation of the business over a number of years.
Taxation Issues. Valuable inheritance tax reliefs may be available for you if you gift part or the entire farm during lifetime or through your Will. These reliefs are, in fact, is a double-edged sword for the next generation of aspiring farmers as, on the one hand, it means that most, if not all, of your farm might be passed to the next generation free of Inheritance Tax which, for others, would be levied at 40% (subject to exemptions which are available). However, on the other hand, it can be argued that these reliefs just add to the upward pressure on land values as wealthy individuals looking for a “tax shelter” invest in land.
Retirement Planning. Particularly if you are a smaller farmer or if you are finding it increasingly difficult, if not impossible, to make a profit, how do you contemplate and then deal with retirement, thereby allowing the farm to be passed on? There may well be no retirement fund which has been built up over the years and there may well be no second house on your farm to move into, allowing the next generation to make use of the farmhouse. Planning restrictions and/or the high cost of building a bungalow for retirement may mean that you are “locked in” to the farmhouse.
Bank Borrowings. Interest rates are at a record low but how long will this last? Handing over a farm with large debts may make it difficult for your farming business to survive in the medium or long term. Regular reviews of the borrowings and updating of business plans with the bank and an accountant should be at the top of your “to do” list.
Land Values. It is tempting to think about cashing in on the high value of your agricultural land. This might produce the windfall required to allow you to repay the bank, buy a retirement house and perhaps give something to all the children, but it may also mean that valuable taxation reliefs are lost and there may, perhaps, be a Capital Gains Tax bill to be paid following a sale. Young aspiring farmers are unlikely to be able to afford to buy your farm and so your family farm may be sold to neighbouring famers who have the ability to increase their acreage to improve profitability.
Diversification. Many farms, perhaps those in upland or remote areas, will not have the chance to diversify their businesses but you could look at opportunities such as self-catering holiday cottages, renewable energy, farm shops, leasing surplus sheds to local businesses, constructing new units for small businesses and horse liveries. Of course, careful thought is required for any form of diversification to ensure that you understand the taxation issues and ensure that you have the correct business structure is in place and that your existing and future farming activities are not adversely impacted.
Robin Dunlop is a solicitor in our specialist Land & Rural Business team. If you would like further information on this or any other matter affecting agirculture please contact Robin on the details below.