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Share farming: a practical solution to succession worries

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Posted by Robert Lee on 10 May 2016

Robert Lee - Head of Corporate Law
Robert Lee Partner - Head of Corporate

The 2014 Oxford Farming Conference predicted that the next decade would see an increase in share farming as the shape of the industry changed, with “a divergence between those owning land and those farming (operating) it”. The CLA’s 2014 report into share farming endorsed the view that it could, in the right circumstances, be a good solution for many farmers looking to reduce their workload but with no one to help them do so.

Popular in New Zealand and Australia (where 17% of farms are operated as ‘share farms’) the idea of share farming does seem to be gaining ground in the UK. The majority of farmers in the UK are heading towards retirement (the median age of UK farmers is 59 source: Defra) and many do not have an obvious successor to take over the day to day operation of the farm. On the flip side, there are steadily increasing numbers of students graduating from agricultural colleges and young farmers who cannot afford to buy or rent land who are trying to gain a foothold in the industry. Share farming has the potential to square this circle.

Getting the best out of a share farming arrangement

Share farming is neither contract farming, a partnership, a contract of employment nor a tenancy agreement and it is imperative that the agreement between the parties does not give rise to any such interpretation because to do so may invoke the law of unintended consequences. A carefully drafted agreement will do much to underpin the trust which constitutes an essential element of a successful share farming arrangement.

Generally speaking, the farm owner provides the land, buildings and fixed assets and the farm operator provides machinery and labour with both contributing livestock as applicable. What makes share farming distinct from, say, a partnership is that both individuals trade as entirely separate businesses. This enables the owner to retain any tax advantages and the operator to build up capital. The synergy between age and experience on the one hand and innovation and enthusiasm on the other can transform a farming operation.

Main elements of a share farming agreement

It is critical that a share farming arrangement is drawn up in writing and is not reliant on a verbal agreement. Although every arrangement will be tailored to individual needs there are standard clauses, common to most contracts, which will be included such as accurate identification of the land to be farmed; termination and renewal conditions; dispute resolution; and risk and liabilities.

Other aspects to considered within the agreement are the inclusion of an asset register, recording exactly who owns what and what condition they are in; a clear statement of duties and responsibilities between the parties; a statement of the costs involved in running the farm; details on the value, expressed as a percentage, of each party’s’ contribution to the business which will help to determine how any profit should be calculated and shared; and what happens in the event of the death of either party.  The agreement should also state explicitly that the share farming arrangement does not constitute a partnership or tenancy agreement, or a contract of employment. 

Why enter into a share farming agreement?

A share farming agreement allows the farm owner to remain actively involved in managing the land while being able to offload some of the more arduous aspects onto younger, stronger shoulders. In addition, providing they can prove their active involvement (ideally by recording decisions made in regular, minuted meetings), the farm owner can continue to benefit from tax reliefs including capital gains taper relief, business property relief (BPR) and agricultural property relief (APR). BPS is claimed by one party (usually the farm owner) and then divided between the parties in proportion to their contribution / investment.

From the operator’s perspective, a share farming agreement gives him or her a foot on the ladder, an opportunity to set up his or her own business, build capital and gain first-hand experience of running a farm. Each party bears their own risk unless the agreement stipulates otherwise: as they are running separate businesses with separate bank accounts, invoices and VAT returns, there is no cross-liability.

Securing a future

Share farming is not suitable for everyone and is only one of several business structures a farmer can consider when determining the future of his farm. However, its flexibility allows farmers to scale back their day-to-day commitment while remaining involved in the overall management of the farm, and operators to gain a return on their investment while developing their industry expertise.  A correctly drafted agreement underpins what should be a transparent, collaborative relationship between two separate businesses both working towards a common goal: the securing of their respective futures. 

About the author

Robert Lee

Partner - Head of Corporate

Robert specialises in mergers and acquisitions, and corporate restructuring.

Robert Lee

Robert specialises in mergers and acquisitions, and corporate restructuring.

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