An alternative approach: Share farming

Sally McFadden of Thomson & Bancks explains how share farming works

Agricultural agreements have traditionally followed a partnership, tenancy or contract farming arrangement. As farmland may often stay in the same family for generations, share farming can be a great way to allow new parties to get into farming and to relive some of the operational burden from landowning farmers.

  • The ‘owner typically provides land, fixed equipment, expertise and a share of working capital or livestock and will receive a share of the actual commodity produced.
  • The ‘operator provides labour, machinery and a share of working capital or livestock and again receives a share of the actual commodity produced.

Return:

Each party should work out the values it brings, as these contributions should then be reflected in the profit-sharing arrangements. 

  • The parties share the costs (inputs) and share the income from sales (gross agricultural output) in the agreed proportions.
  • The owner will own the growing crops but the agreement should restrict the ability to sell, the parties then have agreed shares in the severed crops and/or livestock.

Share farming allows both parties to share the risks and rewards on pre-arranged percentage terms with the owner providing the land and the start-up farmer or operator being responsible for operational activity.

Benefits:

Both parties benefit from the economies of scale from the two businesses working together in addition each have their own benefits.

The owner:

  • retains some management responsibility whilst receiving additional resource for the physical or specialist areas of farm work;
  • can release working capital;
  • should receive a higher share of profits than under a contract farming relationship;
  • gains time by reduced involvement in the day-to-day management.

The operator:

  • has the potential to gain a larger share in the business over time;
  • may enter farming in a more substantive and permanent way than as a contractor;
  • requires less initial capital investment than under a tenancy or purchase;
  • may improve their borrowing potential;
  • has the ability to run its own farming business with some capital, but no land.

Tax & Reliefs: 

You should rely on your own specialist advice but in principle both parties are ‘farmers’ for tax purposes, with each party running its own farming business with separate accounts, tax assessments and VAT registrations.

Income & Capital Gains Tax: each party carries on a separate trade of farming for income tax and CGT purposes and can apply farmer’s profit averaging.

Agricultural Property Relief: the Owner remains in occupation for the purposes of APR however they could lose APR on the farmhouse if they do not have an active role in the day-to-day farming.

Basic Payment Scheme:  Unfortunately only one share farmer can claim BPS and must include all of the land farmed under the agreement, the income from BPS payments is shared in agreed proportions. The BPS claimant is also responsible for ensuring that the cross compliance conditions are met.

Care must be taken to avoid creating either a partnership which could create potential liability for each other’s debts; or a tenancy, as this could risk loss of Inheritance Tax and Capital Gains Tax reliefs.

The details of the arrangement should be set out in a written share farming agreement and should include details of contributions and profit share, in addition; 

  • the Owner should retain ownership of the land and grant the Operator a licence to enter and farm the land, if the Operator requires accommodation it is simplest to grant a separate assured shorthold tenancy.
  • details of the length of the term and any termination provisions for instance the ability to end the agreement on death, incapacity or insolvency.

Share Farming is useful in developing a medium or long-term arrangement and can be particularly attractive in specialist areas of agriculture where know-how and skill are the difference between success and failure.

Finding the right party is fundamental, as share farming relies on a close working relationship with both parties acting for their mutual benefit. It’s important for both the owner and the operator to carefully consider their circumstances and assess what the arrangement will require from them before entering into a share farming agreement.

Sally McFadden is an Associate Solicitor in the Business Services Team at Thomson & Bancks LLP dealing with all commercial property matters for a mix of business, agricultural and not-for-profit clients. She also has niche specialist experience on agricultural matters and energy and renewables. To speak to Sally call 01684 299633 or visit www.tbsolicitors.co.uk