Contract And Share Farming – Considering The Alternatives To Leasing

It is no secret that the increasing complexity of the regulation of agricultural holdings in Scotland is leading many landowners and farmers to consider alternative farming structures. Use of contract farming is already well established but there is certainly room for growth, and, recently there has been industry-wide recognition that share farming may provide a way forward for Scottish agriculture. Properly constituted share farming and contract farming agreements are not leases. For landowners who are looking to move away from the inflexibility of agricultural leases and considering structures that allow retention of control and growth of in-hand farming operations, it has never been timelier to consider contract and share farming. These structures may also offer a step forward for new entrants looking to join the sector.

Getting the right structure for your business will depend on many factors; to assess these it is important to look at the key differences between agricultural leases, contract farming agreements (CFAs) and share farming agreements (SFAs). We will also consider the impact on control, income, tax and subsidy under each structure. These are, of course, general comments and no substitute for specific advice.

Leases - The landlord relinquishes control and exclusive possession of the holding to the tenant - who farms as their own business. In return, the landlord receives a fixed income in the form of rent but he is not exposed to the risks of the tenant's business other than to the extent of rent and lease obligations. Subject to any permitted use restrictions or landlord reservations, control of the farming operation is handed over to the tenant who takes on the risk of the farming enterprise but reaps the benefit of any profit generated. In terms of tax, the landlord will pay income tax on the rent received and the tenant will be liable for any taxes incurred as a result of his or her trade. The landlord should meet the criteria for agricultural property relief (APR) for inheritance tax purposes. The tenant will usually claim the agricultural subsidy as a farmer and these will either be owned by the tenant or leased with the land by the landlord.

Contract Farming Agreements - The farmer (landowner) will engage a contractor under an agreement for services. The landowner remains the farmer in his own right. The objective of a CFA is for the farmer to control the farm policy and have the contractor supply services to achieve...

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