The UK has entered into a post-Brexit world, which brings change to industries across the country, including farming. As with any major shift, there are both challenges and opportunities ahead, and it is key that farmers understand the impact that changes to direct payments and valuation of farmland in particular will have on succession planning.
The Agriculture Act of 2020 will eventually phase out the current direct payment system over the course of the next seven years.
The government has also introduced other methods of pay to farmers to help fill the gap in income, these being the environmental land management schemes. These schemes aim to further protect and improve the country’s environment while supporting farmers simultaneously. Environmental land management schemes will pay farmers for providing public and environmental benefits, such as air and water quality, public access footpaths and productivity.
2022 will also see the introduction of an exit scheme, which 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 coronavirus pandemic has perhaps encouraged a timely focus on the farming business and how it interacts with the public and the need for a secure and healthy food supply. This and the recent, often devastating, effects of climate change underpin the importance of well-managed land.
What does this mean in terms of planning for the future?
With so much focus on the future of farming, planning ahead for different eventualities is critical. The value of a farm is likely to change as business valuations now have to consider the phase out of the current direct payment system as well as the new focus on environmental factors. While in the past farms may have found footpaths a nuisance, now catering to public and environmental benefits would not only create another source of income but could also encourage public support.
However, owning land under conservation may introduce more difficulty for planning. It is uncertain whether land under conservation can still be considered an asset for trading purposes. Questions are also being asked about land under conservation maintaining agricultural status, would the biodiversity be included in the agricultural value?
Passing on assets and planning for succession can be a difficult process in farming. Due to the nature of farming assets they cannot always be split equally, which can cause distress and feelings of inequality especially within a family business. Since farms are often inherited, there is also a pressure and responsibility to carry on the farm with the awareness of the work put in from previous generations and their commitment to the future.
A mixture of experience and new ideas and skills from different family members can drive a business forward. So it may be a good opportunity to review business plans and assets and consider whether the farm could support funding for new schemes and diversification.
The importance of sound governance
Sound governance is crucial to any succession plan, particularly within farming where carefully wording agreements and securing important documents can alleviate potential disagreements on sale or transfer of assets.
It is important to ensure that the land titles and the farming assets are up to date, clear of potential issues, held in the most tax-efficient way and ready to deal with.
Pre-nuptial agreements are a good way to start planning early on, as it will avoid the uncertainty, cost, time and stress of litigating about the matrimonial finances in the far future. If it is too late to form a pre-nuptial agreement, a post-nuptial agreement can still provide certainty and protection during a time when the future of farming is unclear. Furthermore with changes possibly being made to the status and value of agricultural property, it is recommended that land ownership and trusts are properly documented and registered to be passed on to future generations securely.
When planning for succession it is also important to think about later life. If a business owner loses capacity, drafting up a Lasting Power of Attorney can help protect the process of succession and pass on assets as intended. Discussing succession plans in advance with advisors and those who are to succeed the business can further consolidate this process and ease possible disputes.
Farming businesses and families are experiencing many changes and have a lot to consider when looking to the future of farming, therefore it is best to seek advice from professionals early to have successions plans in place.