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CONTRACT FARMING OR FARM BUSINESS TENANCY?
If you are looking to expand your business, the next couple of years may throw up more opportunities as the safety net of the Basic Payment Scheme is phased out, but it is necessary to understand how a Landowner will be thinking when considering Contract Farming or a Farm Business Tenancy.
The last year of the current BPS regime is 2023 and in future years under the current proposals those who have previously claimed will receive a payment each year until the scheme is phased out fully in 2027, whether they still farm the land or not.
A guaranteed payment each December of around £90 per acre has helped many businesses weather a bad year when yields or prices have not been as anticipated.
Stewardship schemes will help but do not replace this level of security and crop contracts may well become more prevalent in the future. Stewardship generally requires active management, as does keeping on top of the Farm Assurance inspections and Nitrate Vulnerable regulations. The list goes on.
If the above does not persuade a Landowner to look again at the farm business, the cost of replacement machinery, the price of fuel, and the availability of seasonal labour probably will.
Contract Farming allows the Landowner to step back from the day-to-day cultivation work, and take as much or as little responsibility for the day-to-day decision making as both parties agree to. A properly worded Contract Farming Agreement will reflect all that is agreed and the remuneration to each party will reflect the responsibility and the risks being taken.
For the Landowner this should still preserve the benefits of being a farmer for Income Tax, Capital Gains Tax and Inheritance Tax purposes, and particularly relief on the land, buildings and farmhouse.
A Farm Business Tenancy still allows the Landowner to step back from the day-to-day business and receive an agreed rental return. All the risk of the business is then with the Tenant but the management and accounting of activities on the land can be more easily incorporated into the Tenant’s existing business.
For the Landowner, the income becomes an investment income and not an earned income for tax purposes. Unless the Landowner has other business interests, farming will cease to be a business.
The property will cease to be a business asset for Capital Gains Tax purposes. This may not matter if there are no plans to develop any of the land or to to sell or gift any of the land, but may mean the Landowner only wishes to let the land for a short term of 2 to 5 years to retain some flexibility for the future.
The land will still retain its Inheritance Tax relief when let, but only for what it is worth as farmland. Any hope value or pony paddock value would be taxable at the death of an owner on that proportion only. The same would apply to farm buildings which are included in the Farm Business Tenancy and would qualify for relief for their value as farm buildings, but not for any potential development value above that agricultural value. The farmhouse would only qualify for relief if it is included in the Tenancy.
While the Tenant Farmers Association may blame Land Agents and Valuers for the lack of long-term Farm Business Tenancy opportunities, they do not write the tax legislation. Nor do they decide which party is in government, and if there is a change in two years’ time it might be necessary to revisit current arrangements to ensure the income and Capital Tax regime is not disadvantaging either Landowner or Tenant farmer.
Everyone’s circumstances are different and advice to the Landowner from ourselves and the Accountant is a must before entering an agreement.
R L Cordingley BSc FRICS FAAV
Review of 2023
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