Rural reform: The changes and challenges
Changes to the Common Agricultural Policy, land reform and an ageing farming workforce are making life difficult for farmers and landowners. Anthony Harrington reports.
The present year is shaping up to be a crunch period for land issues in Scotland. Not only do Scottish farmers have the uncertainties of the reformed Common Agricultural Policy (CAP) to deal with, there is also the Scottish Government's land reform programme.
The Scottish Government has made it clear that it intends to press ahead with land reform sooner rather than later. All the indications are that this will set out a radical solution intended to bring about what the Government sees as both "a fairer distribution" and more efficient use of land in Scotland.
The Conservative MSP Murdo Fraser expressed the views of some landowners when he warned the recent Scottish Conservative conference that the Scottish National Party has committed itself to the pursuit "... of a leftist utopia of community land-ownership across the entire country… the Scottish Government is pursuing an ideologically driven class war in our countryside, driven by the politics of envy."
One man's "class war" is another man's vision of "a fairer distribution", but either way politically charged agendas appear to be an inextricable part of the land debate and look set to play out very significantly in the months ahead. Further clarification as to what exactly the Government plans to do about land reform is scheduled to appear just about the time this issue of The CA publishes. This may well shed a brighter light on what is still a rather foggy issue.
On the plus side, demand for prime agricultural land was strong through 2014 and that strength has continued into 2015, with prime arable land fetching some £10,000 an acre.
The next generation
A further issue, and one that is being addressed by the "under-40s" provisions in CAP, is the demographic time bomb facing Scotland's farming communities. It is not good for any sector to have a workforce with an average age headed towards 60 plus and unless the sector can attract a strong influx of youth, the future looks grim indeed.
The under-40s scheme involves an additional payment available to young farmers under the new Basic Payment Scheme, provided their involvement in the farm meets certain criteria. The most important of these is that they have to be the majority shareholder in the farm, with a minimum of a 51 per cent ownership stake. A 90-hectare farm is about the minimum that DEFRA (the Department for Environment, Food and Rural Affairs) will consider, and the young farmer has to be setting up, and heading up, a new agricultural holding.
If he or she fulfils all these criteria they will get an additional payment worth 25 per cent of their Basic Payment for the first five years. Leslie Reid, a partner with Galbraith Pritchards, says that he has been involved several times, already certifying that a new, under-40s partner fulfils all the criteria. "The most recent case was a daughter, aged 22, who now has 51 per cent of the family's farming business."
The danger, he points out, is that some older farmers will seek to "game" the system by bringing in whatever youthful relative they can get hold of, mistakenly believing that all they have to do is a paper transaction to claim the payment.
There are huge risks here for the farmer, and not just because a bogus set-up will look like just that, and will be open to challenge, with potential fraud charges hanging. "There is no doubt that farmers will look to use the rules, but there is a huge need for them to take professional advice to ensure that they are fully aware of the risks involved in ceding a majority shareholding to a younger family member," Leslie says. If junior decides to sell the farm and sail off around the world, the farmer will be in deep trouble.
Does the cap fit?
Many farmers still do not know exactly when they will get their first payment under the new CAP system. The previous regime, in which they were paid by 31 December, gave farmers some certainty to manage their cash flow. Not knowing how deep into the first quarter of 2016 they will have to wait for payment is a serious problem for many.
Sheena Gibson, head of agriculture at Henderson Loggie, points out that maintaining a good relationship with the bank has been absolutely key for many hard-pressed farmers over the last year or so, and this relationship will be even more critical as farm cash flows are hit by the CAP payment delay. "We have seen cereal and milk prices under huge pressure, and many farms have been running bigger overdrafts. The old days where the farmer simply sent the bank the farm accounts once a year are a distant memory," Sheena notes.
Accountants now need to be much more involved in helping the farmer liaise with the bank. Many farmers will see this as an additional expense but good professional advice now can really help to keep a farm afloat in difficult times, she notes.
Sheena believes that most of the farmers the firm deals with are expecting to take a cut of perhaps as much as a third when the subsidy comes into force. This is pushing farmers towards being more innovative in creating new revenue streams and renewable energy is proving an attractive way to go for many farmers.
Ian Bailey, head of rural research at Savills, says that he expects to see some small farmers withdrawing from farming as a result of the subsidy cut. "Generally death, debt and divorce are the big drivers for farms coming onto the market, but the CAP reform could well be the straw that breaks for some," he comments.
Right across the UK, prime arable land has been doing well for more than a decade. "In the last 10 years land values have gone up 250 per cent, whereas in the 10 years prior to that, the increase was only around 40 per cent," Bailey notes.
Land reform fears
Robert Scott-Dempster, a partner with Gillespie Macandrew, says: "The problem is that so far there has been a lack of an overarching view of what is best for Scottish agriculture in the 21st century. Any attempt at land reform should begin from a clearly articulated vision of what is best for agriculture."
Robert points out that inheritance laws and taxation are what shape land. There has been much talk from the Scottish Government about land value taxation, but this issue is inextricably tied up with other capital taxes, and tax legislation is not a devolved matter, he notes.
Apart from that problem, there is a real concern about the transparency of land-ownership. The present land register is based on a master plan and anyone can pick a spot on the map and discover the associated ownership documents. The problem is that the historic register simply records the deeds and boundaries as set out by the lawyers who drafted the documents. Landed property only moves from the old register to the new register when there is a transfer for value. If no money changes hands, there is no legal obligation for the changed deeds to be placed on the new register.
Robert points out that only about 25 per cent of the land in Scotland is now on the official land register. "Landowners were given 20 years to move their deeds voluntarily to the new register. There are now nine years left. Publicly owned land has to move to the new register within the next five years. We have been told that if landowners fail to act in time the Land Registry will go ahead and transfer the deeds anyway. Doing so without the cooperation of the landowners would be a charter for some serious and costly errors, as boundaries have to be redefined or interpreted and issues of ownership need to be clarified. So this is another concern," he comments.
Leslie Reid argues that the temptation to hearken back to the 18th century and the enclosures saga is a huge red herring, as is the absentee landlord story. "There are not that many absentee landlords in Scotland. You do have foreign landowners, including Dutch and German owners, but as far as I am aware they are good landowners and get involved in their local communities," he comments.
James Robertson CA, formerly head of Ernst & Young's Landed Estates Group and now rural business consultant with Chiene & Tait, is a former convenor of the ICAS Tax Practices Committee. He is currently part of an industry group working with HMRC on updating their guidance on the tax and accounting treatment of the new CAP regime. For Robertson, much of the debate about landowners and whether or not they get too many tax breaks and subsidies, or how exactly to "reform" agricultural taxation, suffers from a lack of understanding of a hugely complex area, and a lack of clarity about the policy outcomes being sought. What should Scottish land ownership and, perhaps more importantly, land management look like and how would changes to taxation help to achieve or even hinder those aims?
At present farmers and anyone working their own land, rather than mainly holding it for investment may qualify for two types of relief for inheritance tax (IHT) purposes. They get agricultural property relief (APR) on the agricultural value of their farmland together with qualifying buildings and business property relief (BPR) on other business assets including machinery and livestock. The farmhouse is also eligible for APR.
"The major relief that agricultural landowners get that is not available to other businesses is APR, which also applies to farms the landowner rents out to tenants," he notes. If you let a factory out, in contrast, there is no equivalent relief.
Abolishing APR, which some are calling for, might well mean even less land becoming available for rent as it would create even more incentive for landlords to get land back in hand. In addition, it could hurt working farmers, as it would mean the loss of APR on the farmhouse. Neither result is the outcome abolitionists want, emphasising the importance of focus on what Scottish farming should look like. For now, IHT is reserved to Westminster, but the Scottish Affairs Committee, to which Robertson gave evidence, recently issued a report on land reform which called for a review of APR.
Succession law changes
Also on the land reform agenda are changes to the law of succession to remove the distinction between heritable and moveable property. Scots law, unlike the rest of the UK, has rules on forced heirship but these apply only to moveable property. This is within Holyrood's remit.
"Those who expect such a change would lead to the break-up of the large landed estates may be disappointed," says James Robertson, "as many of Scotland's largest landed estates are held within company or trust structures, some for more than a century. It could have a very real impact, however, on the typical family farm, leading to break-up or sale."
Finally James notes that the Scottish Government has said that it remains committed to preventing sporting estates benefiting from agricultural subsidies and will be reinstating business rates on sporting businesses. It might be seen as fair, he argues, that land primarily used for sporting should not be subsidised (in England, land used for solar farms is ineligible even if sheep graze around the panels) but the original proposals were so wide that they would have impacted very many ordinary farming businesses, and were withdrawn.
Mike Townsend a director at Savills, and head of South West England Rural Professional Services, points out that the Balfour test, which examines whether or not a farming estate is wholly or mainly engaged in business, rather than being an investment, applies north and south of the border. It determines whether an agricultural landowner qualifies for business tax relief or not. (The test gets its name from a case involving the 4th Earl of Balfour.)
Mike says that apart from the land reform issue in Scotland, one of the major concerns for English landowners continues to be working out how best to secure a tax-efficient and business-efficient succession when the principal dies or retires. "No matter how large or small your agricultural holding, you need to take expert advice to ensure that everything is done to maximise the value of the business and to safeguard its future," he comments.
Anthony Harrington is a freelance business journalist. This article first appeared in the July 2015 edition of The CA.