The rural challenge
Protecting the wealth of a farming business calls for a range of experienced lawyers, says David Wood
The rural sector is facing legal and practical challenges because of the impact of covid-19 and Britain’s withdrawal from the European Union.
The sector has changed hugely over the last 150 years, having endured the great agricultural depression which lasted for the better part of 80 years until after the Second World War.
Food security was high on the political agenda and at the end of the war food production needed to be maximised. This resulted in the Agricultural Act 1947 which provided for generous guaranteed prices for major agricultural commodities.
UK agriculture thereafter enjoyed a period of price stability, and prosperity in farming advanced quickly. Since the 1970s, costs have continued to rise for farming businesses while the value of soft commodities has declined in real terms. From the early 1990s we have seen, of necessity, significant diversification by the owners of rural businesses.
Brexit
There is a great deal of uncertainty around Brexit for businesses and individuals in the rural sector. For many businesses, particularly those whose income stream is less diversified, European Union support payments have formed a major part – if not all – of the bottom line.
These businesses, along with their owners and other stakeholders, will be proportionately more affected by changes in support payments going forward. It is therefore important that the owners and managers of these businesses take the time now to consider their asset, skills and cost base; then develop a clear strategic plan both for the business and the family’s financial and human capital invested in it, in order to remain relevant and profitable.
Solicitors have a leading and extremely valuable role to play in the preparation of a workable and coherent succession plan but, perhaps more importantly, in the execution of that plan, the ongoing review of it and any adjustments.
It takes an immense amount of knowledge of the farming industry, the family and the existing business ownership and management structure, and the available possibilities regarding a new structure, to effectively advise on and devise a practical and effective succession plan.
Preparing a good succession plan will usually require input from experienced agricultural property, capital taxation, trusts, family and employment lawyers – with the occasional addition of company lawyers where a client has a corporate body in its existing structure or requires one in the new structure. And no matter how good the initial plan is, tweaking (whether major or minor) will be required during its implementation.
The involvement of an experienced and well-regarded lawyer to chair the process can keep the process on track, avoid blind alleys and ensure the client receives best value from the professional team involved.
The obvious challenges presented by Brexit will be caused by the negotiation of trade agreements by the UK government with the rest of the world, including Europe and America. The UK is an exporter of many agricultural commodities including lamb and pork, and wheat. Any reduction in price caused by tariffs could cause significant financial pain.
If these are accompanied by price reductions in domestic markets because of imports, there will be some challenges ahead which may result in further structural changes to the industry. Paradoxically, this may ‘help’ the industry with perhaps its most significant challenges – succession both in terms of ownership and management and also skilled labour.
As trusted professional advisers, we can add significant value to the client’s business by ensuring we understand the business and personal/family objectives, as well as the industry and the commercial circumstances in which they operate.
Employment
Rural businesses in some areas are still labour intensive, with seasonal fluctuations in labour requirements. The availability of labour is fundamental yet there are serious and legitimate concerns about the ability of European nationals to continue to live and work in the UK (and to travel to work in the UK) post-Brexit.
We have already seen large numbers of east European workers returning to their home countries because of concerns (and their perception), following the Brexit vote, that they were less welcome in the UK than they had been. Also, over the last few months, the difficulties that labour shortages cause for our rural businesses have been demonstrated by covid-19.
It is fundamental that parliament takes this issue seriously. It must, among other things, consider the impact of the social security system. We have seen elements of the European migrant labour force being replaced by UK national labour during the lockdown, but there are fears within rural businesses that this may not continue in the short to medium term.
Many clients involved in agriculture, its support services and food production and processing have significant numbers of employees and labour requirements which are almost always seasonal and time critical. The impact of a client getting it wrong in terms of labour must not be underestimated. Possible prison sentences of five years and an unlimited fine apply to those who employ illegal immigrants.
Agriculture is part of the worldwide food supply chain. Although the Modern Slavery Act 2015 does not make it mandatory for large businesses to review their supply chains to ensure there is no modern slavery, thankfully those businesses are increasingly starting to do so. Any breaches by those in the supply chain will cause both reputational and commercial damage both to those businesses and the customers further up the supply chain on whom they depend.
Given the level of risk to our clients, we as a profession need to recognise the value to the client of proactively advising all relevant clients to avoid extremely serious breaches. This represents an ongoing opportunity for the profession to work to minimise the risks by ensuring clients’ systems and processes are robust and fit for purpose.
Covid-19 has highlighted the issue of food security. And for a while, before and during the first part of lockdown when basic food items were unavailable for the first time in decades, it appeared that the issue of food security had suddenly become important – both in politics and to the general population. This is particularly ironic given the leaked memo in February 2020 from Tim Leunig, a senior government official, in which he suggested that Britain did not need its farming industry.
Many rural businesses saw a significant jump in demand from both existing and new customers although this may now be decreasing. Brexit is likely to cause further issues for the incredibly sophisticated and expensive supply chains which get food onto the nation’s plates, whether this food is produced on these shores or overseas. It is not inconceivable that we may be facing a situation where the British population has real concerns about food availability for the second time in a 12-month period.
There is no doubt that Brexit has caused uncertainty and prompted a delay in capital spending decisions for many rural businesses and those in the farming and food production sectors.
Succession
The increase in ill health and death rates caused by covid-19 has highlighted the rather vexed issue of succession for many in rural businesses. I say ‘vexed’ because succession is rarely straightforward in any business or family and there is no ‘one size fits all’ approach. Of course, many rural businesses are family businesses.
Agriculture and landed estates are particularly at the sharp end of an uncomfortable demographic, covering ownership and strategic management, operational management and labour. There are fewer young people coming into the industry; and there’s also the reality that the return on capital in other industries is usually markedly higher than in agriculture or estate ownership.
Families still actively involved in agriculture and land management need to plan and prepare for succession to ownership and strategic management of their assets and businesses.
Done badly or not at all, succession planning can be disastrous, but if it is done well family businesses can last the best part of 1,000 years – like a few of the land-based businesses for which I have been privileged to act.
Good succession planning will include identifying successors who must have the ability, passion, intellect, work ethic and entrepreneurial spirit to enable the business to prosper and develop, while keeping the capital safe or minimising the risk to that capital.
Succession, along with the uncertainty caused by Brexit and the expected reduction in subsidy payments to rural land owning, farming and land management businesses, will result in opportunities for new entrants which have been lacking in some sectors. This will arguably be because of support payments restricting competition in some sectors.
Landowners and their advisers are increasingly likely to look at working in partnership with others who may be able to combine factors of production more efficiently. Consideration will have to be given as to the most efficient structures for the ownership and occupation of land.
The government has asked the Office of Tax Simplification to review capital gains tax (CGT) (hot on the heels of two successive reviews into business relief and agricultural property relief (APR) for inheritance tax (IHT)).
The availability of holdover relief under section 165 of the Taxation of Chargeable Gains Act 1992 is often critical in succession planning for farmers or rural landowners, given the significant increases in land values since March 1982. It has been suggested that there may be changes to CGT in the Autumn budget. If holdover relief were to be abolished, tax and succession planning would become much more challenging and probably more expensive.
We will only know, with the benefit of hindsight, whether there’s a short window of opportunity between now and the budget when land and business assets can be transferred down a generation or two without any (or any significant) immediate tax cost. This gives solicitors a huge opportunity to discuss with their farming and landowning clients whether to take advantage of the current IHT and CGT rules and reduce risk to the family capital and business by making appropriate gifts now.
For some clients, the act of succession planning will highlight the fact that the most appropriate step will be for the present generation to retire. In which case, the difficult decision whether to sell or retain the land will have to be taken.
If succession means exiting a particular business – because of structural changes, competition or lack of availability of the necessary human or financial capital – practitioners must work to ensure the impact of taxation is minimised in order to maximise the amount of capital available for the family to invest in the business or other assets.
There is a significant difference in the net figure if CGT is paid at the general rate of 20 per cent, rather than with the benefit of entrepreneurs’ relief which brings with it a rate of 10 per cent. Timely planning can make a huge difference, particularly where the trustees of discretionary trusts own land. In that case, consideration might be given to appointing a life interest to a beneficiary who will then trade on the land in question.
In relation to IHT, advisers need to be cognisant of the fact that APR under section 116 of the Inheritance Tax Act 1984 will only apply to the agricultural value and not to any value which is over and above agricultural value. If the land was let on a tenancy beginning before 1 September 1995, then except for some limited circumstances APR will only apply at 50 per cent.
There is significant value to be added for clients and their families by maximising the use of IHT reliefs: by increasing 50 per cent APR to 100 per cent where appropriate (eg by the grant of a succession tenancy); and by securing business relief at the rate of 100 per cent, so that the value over and above agricultural value is fully relieved.
For rural businesses which are well prepared with succession plans in place; and have
properly and legally structured their affairs to minimise the impact of taxation; the challenges faced will produce incredible opportunities.
David Wood is a partner in the private wealth team at Ashfords ashfords.co.uk
