Grasslands’ Contract Farming Agreement
At Grasslands, we use contract farming agreements as a means of managing our relationships with farmers. These agreements formalise our arrangements, making it clear what each party is committed to contributing to the project- the dairy farm. By doing it in this way, farmers can remain eligible for their Agricultural Property Relief (APR) and avoid crushing inheritance taxes.
To help you understand how this all works, we first need to explain the basics of inheritance tax.
Inheritance Tax
Put simply, inheritance tax is a tax on the estate of someone who has died. An ‘estate’ includes all property, money and possession belonging to that individual. Currently, the standard inheritance tax rate is 40% and it is charged whenever your estate exceeds £325,000. This figure is known as the inheritance tax threshold and is liable to change at any point. However, exceptions can be made through various relief allowances, including APR. Under the Inheritance Tax Act of 1984, some agricultural assets have been granted exemption from this tax, or at least a partial reduction.
Agricultural Property Relief
In general terms, agricultural property can be defined as agricultural land or pasture. The property must have been owned and occupied for a period of at least 2 years or, if occupied by someone else, owned for at least 7 years. Being even more specific, it includes the following:
- Woodland- must be occupied and supportive of the land and pasture
- Farm Buildings- must be occupied by someone employed in farming, a retired employee or spouse/civil partner. The building must be supportive of the land and pasture
- Farmhouse/Cottage- must be of a character, nature and size appropriate to the land or pasture
Any land grazed by horses who are not explicitly connected to agriculture, does not qualify. Also disqualified are:
- Farm equipment and machinery
- Derelict buildings
- Harvested crops
- Livestock
- Property subject to a binding contract for sale
Contract Farming Agreements
Essentially, a contract farming agreement is a joint venture between a landowner/occupier and a contractor. For clarity, a joint venture is a business arrangement between a minimum of two parties, with a focus on one specific project or business activity, with both partners sharing their resources. Each partner brings different capital inputs to the table and they share the surplus.
Contract Farming Agreements are often more flexible than tenancies and partnerships. As a rule, they provide a greater return for the landowner/occupier than standard tenancy agreements. These benefits make such agreements highly appealing to a wide variety of people.
From the farmer’s perspective, it can often be helpful to reduce the amount of capital tied up in machinery. If they want to reduce their workload, these agreements can significantly cut down on their day to day management and the physical, hands on farm work. For investors who want to get involved with the tax advantages of land ownership but lack any true farming experience, a contract farming agreement provides them with the necessary expertise. Looking at it from a financial perspective, these agreements can go a long way to helping farmers achieve the required active status to qualify for the Basic Payment Scheme, a vital piece of subsidy support from the European Union.
The Benefits of Grasslands’ Contract Farming Agreement
One of the major benefits of signing a contract farming agreement is the link to APR. For a landowner to succeed in a claim for APR on their property, including the farmhouse, they need to demonstrate that they play a current active role in the farming business. If drafted and implemented correctly, a contract farming agreement will provide a robust basis for a successful claim.
To fulfil the necessary requirements of APR, there needs to be clear proof of activity. Under the Grasslands system, the landowner will supply the:
- Land
- Buildings
- Fixed equipment
- Bank account
- Youngstock
In return, the contractor will provide the:
- Labour
- Machinery
- Management
- Cattle
The two parties will then need to work together in order to satisfy the other requirements for a successful relief claim. These include records of working hours and minutes of management meetings.
If you want to learn more or discuss how we could help you, please feel free to get in touch!
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