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Protecting family farm business structures in a changing agricultural climate

Many farms are adapting to survive, but in the current climate old family farm structures are often best, one expert said


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Documenting family farm agreements is vital, solicitors Napthens said
Documenting family farm agreements is vital, solicitors Napthens said

The UK farm sector has faced increasing globalisation in recent years and this trend looks set to continue.

 

The industry has undergone significant restructuring, with arguments continually raging over the benefits of investing and upscaling in a bid to lower production costs. These can sometimes bring an increasingly corporate feel to a farm business.

 

However, in the current climate traditional family farm structures are likely to be the best option for many, as long as they are properly documented, said Andrew Holden, head of the rural team at Napthens solicitors.

 

"For many farmers, the ’old’ business structures they are used to are often still the best. Structures are very much partnership-driven, usually involving family members and we have not seen a big drive towards registering companies, for instance, as an alternative," he said.

 

"The limited liability offered by the company structure, which can be a driving factor for incorporation of other businesses, does not have the same benefit for farmers so it is usually a tax-based decision and in the current climate profits on farm are low, so income tax is not really an issue."

 

Mr Holden said many farms were adapting in order to survive. He argued this can bring about family conflicts, making proper documentation of family partnerships more important than ever.


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Common farm business models

  • Sole trader The business and the person who owner are, in effect, the same. Liability for the debts of the business is unlimited. This risk is balanced by a lack of formality and low administration costs
  • Partnership The structure involves more than one person. The partners have unlimited and joint liability for the debts and obligations of the business incurred while they are partners. As with sole trader status, the formalities are few and the administrative burden low
  • Limited company A separate legal entity from its owners. The owners’ liability for the company’s debts is limited, but owners cannot take money from company accounts. Although lower than in the past, there is a significant administrative burden which goes with limited liability

 

"One welcome trend has been many younger farmers have left home to study, spending time at agricultural colleges or even working abroad to gain experience of fresh approaches to farming," Mr Holden said.

 

"When they return to ’take up the mantle’ they tend to want make big decisions about the business – perhaps investment in a new barn or equipment. It is fairly well understood now there is a need to focus on the cost of production to ensure a sustainable business."

 

He claimed a common issue was conflict between current generations and the next generation, who often wanted to grow the farm business for their family.

 

"The key is getting a [family farm] agreement documented so if there is a fallout between those running the business, or the death of one of the partners, the succession planning and in particular the banking situation is protected," he said.

 

"There are plenty of questions which should be asked throughout the life of a farm. In tough situations it is sometimes hard to know what to do. Lawyers and other advisers can offer guidance to help a farmer make a decision one way or another."

 

Napthens also explored how many farm businesses were adapting to survive in the changing global marketplace.

 

"Diversification has not only seen farms move into other sectors, but more recently we have seen members of the younger generations of farming families performing contracting work to supplement incomes.

 

"We know of farmers who have even driven gritting lorries during the winter," Mr Holden added.

Napthens top tips

  • Get family agreements documented so the farm’s banking situation is protected
  • Long-term succession planning and keeping wills up-to-date is sometimes overlooked. The earlier you start the easier it is to plan, and to mitigate any tax liability
  • A will should therefore be constantly updated to plan for children who may leave a business, and to plan for later life – often assets are simply split equally between a husband and wife, but it may be better to distribute some to the next generation and benefit from the available tax relief
  • Lawyers and other advisers can offer guidance to help a farmer make a decision one way or another
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