Peter Bourke and Torsten White comment on the current DEFRA Agricultural Tenancy consultation

30 May 2019

DEFRA have released a consultation paper on agricultural tenancy law reform to see if changes in the law can remove barriers to productivity improvements and facilitate structural changes in the tenant farming sector.  The consultation is available here and the deadline for responding is 2 July 2019.

The consultation makes interesting reading and acknowledges that 1986 Act tenancies will be around for decades to come, so it is important to contribute. If you work in this area we encourage you to respond.

The 1986 Act is complex and requires a detailed knowledge and understanding and the number of true legal specialists in this area is diminishing. If you need specialist advice please contact either Peter Bourke or Tim Olliff-Lee.  Both are Rural Practice Chartered Surveyors as well as solicitors, and agricultural tenancies are their specialist areas.

The consultation raises a wider issue. If the objective is to increase productivity there needs to be a consolidated approach that deals not just with tenancies but also with capital taxes.   

As things stand, the capital taxation regime may in fact be damaging the tenant farming sector by incentivising landowners to take land back in hand. Take, for example, the way the IHT regime treats property that is no longer needed for strictly agricultural purposes. On the one hand it recognises the importance of farm diversification by extending relief to old farming assets such as cottages and converted farm buildings if they are let as part of a mixed rural enterprise in which the farming remains the main element - in such a case the landowning farmer benefits from relief not only on the assets that continue to be used in the farming operation but also the diversified non-farming assets. On the other hand, where an enterprising tenant has sought to diversify his or her business in the same way, the landowner does not benefit from any relief. This begs the question whether the extension of relief to tenanted diversified assets would bolster the tenant farming sector by removing this particular incentive for landowners to take land back in hand and by encouraging landowners to support their tenants if they wish to diversify.

This leads onto the next problem. How do you encourage farmers (or, indeed, any business owner) to hand over the business to the next generation so that the next generation has a real ownership stake in the business? Currently there is a huge disincentive to pass farm assets onto the next generation during lifetime because of the complicated tax regime. All too often therefore the default strategy for the farmer is to "die with his boots on" (with apologies to Iron Maiden). Even ignoring the reservation of benefit issues, passing on a business that contains high value non-trading assets such as cottages (ie assets with no CGT relief) is a financially crippling event. This prevents the younger generation from taking over a business until their late 50's or early 60's, at best. This is far too late. By this time they do not have the energy, enthusiasm and entrepreneurial outlook that they had in their 30' and 40's. That assumes the next generation still wants to take over the business and has not forged an alternative career. What about the elderly farmers who have handed the responsibility over to contractors because of ill health or mental deterioration or farmers’ widows who are not qualified to carry on the farming operation and so employ contractors instead?  In both cases the probability is that the farm is not been as productively farmed as it could be. If the government wants to increase business productivity, not just in agriculture but in every sector, it needs to look holistically at all the issues and produce a comprehensive plan to encourage this.

Increasing flexibility and productivity should be an aim of every business and if the tax system is to encourage entrepreneurs it needs changing. Growing a business is challenging enough and handing over to the next generation, who bring new ideas and refresh the business, should be encouraged. To effect these changes requires real expertise.  If you want advice or help with business succession planning contact Jonathan Stephens or Torsten White.

Perhaps we need an inspired Chancellor to make the necessary changes.

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