Reflections on a taxing budget for farmers and landowners

How will the Autumn Budget impact your business?

We won’t rehash the detail here – the changes, and the reaction to them have been amply covered. Whilst no one in the sector would have designed or desired this suite of measures, the reality is that taking a long hard look at risk and opportunity and getting ahead with difficult discussions, as well as unexpected opportunities, is the only way to secure a positive path through the challenges facing the sector.

Whilst there is much detail to come, now is not the time to wait and see. Better to make a start on considering how the changes will impact your business, and work out your options for responding, bearing in mind there will likely be more than one course of action you could take - with pros and cons to weigh up and preparation required for each.

Tax on inherited assets

The announcement that has generated the most discussion is the introduction of Inheritance Tax (IHT) on agricultural assets. The proposed reforms to agricultural property relief (APR) and business property relief (BPR) will see many farms, estates and other rural businesses face a previously unplanned for, inheritance tax bill. For most, this is a charge generated on the transfer of a business asset that carries a disproportionate capital value to the revenues it can generate.

A new tax burden will always be unwelcome and can act as a brake on investment, and whilst some recognise the need for tough fiscal decisions there are widespread concerns about the impact on a sector already under pressure. There are justifiable worries about the pace of change, implications yet unknown until the finer details are understood, and of course affordability, and the impact on the viability of many land-based businesses.

For some, the unfortunate truth is that this change will present an insurmountable challenge and for others, options will be limited. However, for some there will be ways in which businesses can be adapted to respond to the change with careful and proactive planning, and some reorganisation of ownership and business structures.

Making a success of succession

One impact of the IHT changes is expected to be the earlier transfer of assets and transition of business control to younger generations. With the average age of a farmer in England well above that for most professions, with 68% over 55, and almost 40% over 65, succession has long been a challenge. An increasing number of the next generation of farming families have left the sector, already putting the future of many family farms in question. Whilst the erosion of IHT relief may be the final reason for those without a succession plan to sell, an imperative for earlier asset transfer may attract more of the next generation to return (or stay) and be the catalyst to reinvestment and ultimately to long-term sustainability.

We often support estate families to prepare for and implement succession and provide guidance to those who have just taken the reins as they look to the future. Our role is to understand (and sometimes reconcile) the family’s values, shape a vision and put in place plans for investment and development to enable the estate to thrive for the next generation and beyond. We are no stranger to listening to and empathising with both the frustrations of the next generation who often don’t have the necessary autonomy to drive forward their ideas, and the concerns of incumbents who worry about changing context and passing on liabilities.

Succession planning is now more important than ever, and the technical tax and legal detail will be more effectively applied in conjunction with a mind to the practicalities and impact on business operations. What can be tricky conversations can be aided by looking at things practically. Different scenarios can be considered around the sub-division of assets and/or structures for the management of farms, land, and property assets. This can be approached spatially, dividing the holding into physical ‘chunks’ or financially, with mechanisms in place to deal with ownership, operations and the sharing of income and profit.

Taking a ‘whole farm or estate’ approach – considering the assets, the needs and wants of the individuals, the context for future development, diversification options, and funding for different approaches to land management, can be helpful in looking at the different scenarios for asset transfer and business structures.

Business resilience

Alongside planning for asset transfer and business restructuring, it will be important to consider how the business can be made more resilient. This may be achieved by increasing income from farm enterprises through agriculture, environmental or other diversified activities, or generating capital from development to enable the business to meet future IHT related costs.

Many smaller farms are far from a position to do this at present, with margins already tightly squeezed and cashflow under pressure, investment options are limited. For others, diversification – adapting and evolving business activities to create new income streams or developing land and property assets to generate capital receipts may be essential elements of the forward strategy.

Whilst more pronounced than ever, the need for resilience is not new context for rural businesses. For decades, farms and estates have been responding to opportunities to leverage land and property assets to develop and diversify, to generate new sources of income. Such moves require careful planning and investment, both in the right advice and to meet the capital costs of any development. In most cases a few glamping pods is unlikely to be enough, but there are a wide range of opportunities to rethink land use and land management alongside farming, to enter higher margin markets.

Take some of the landowners adopting environmental land management strategies at scale, most of whom are building in a diversified income model from the start. The most successful examples are taking land management decisions by projecting forward income from Environmental Land Management schemes (ELMs), alongside opportunities related to emerging nature markets, leisure and tourism enterprises and food production, as part of a blended business model.

Where land and property assets are suitable for development this is likely to be made easier by the expected changes to planning policy. Whether promoting land for strategic development, disposing of individual sites, or seeking new opportunities such as renewable energy routes. With many rural planning authorities anticipating big increases in mandatory housing targets, residential development may be feasible for some landowners.

Considering the implications of activity that add value to the estate through an IHT and capital gains lens is key but should not be the only decision-making driver when there are opportunities for increased and more resilient income streams or capital receipts that could change the long-term fortunes of land-based businesses.

Preparation is key

There is undoubtedly a lot to think about, and most advisors are recommending clients to sit tight. Without all the facts to hand, we agree it is not the time for big changes. However, doing nothing is unlikely to be the right approach. We advocate starting to think sooner rather than later about what the practical options might be in terms of managing landholdings so when the time comes for decisions, these are being made from an informed position.

Is it time for a conversation to determine whether there is a successor who may be interested that previously wasn’t, or wasn’t deemed ready?

Are there opportunities presented by incoming changes to planning policy that can unlock lucrative development or diversification opportunities such as housebuilding or renewables?

Is now the time to consider how assets can be used to create new income streams without adding material capital value?

Can you accelerate the adoption of new land management and farming practices to maximise eligibility for ELM funding?

Decisions such as these should not be made in a hurry. Look at the options and talk to advisors who may be able to identify opportunities you have perhaps not considered.

Get in touch

For the last two decades we have been helping rural landowners to understand and respond to challenging issues, and to shape opportunities to deliver successful change.

While we are not tax advisors, lawyers or agents, we speak their language – as well as yours. We are empathetic but no nonsense. We regularly sit alongside families, estate principals, trustees and other interested parties to determine long term strategies for estates of all sizes.

For a confidential conversation to explore your options, please get in touch by emailing info@ruralsolutions.co.uk or call us on 01756 797501.