The Budget and Farming | Tax planning is the headline but don’t forget Divorce

The Budget, unveiled on 30th October has confirmed the announcements of the Government’s new reforms for agricultural property relief and business property relief. The main impact these changes will have on farmers, will be how farmers consider their estate planning. i.e. how they plan to make provision on their death and how they manage any existing trusts or trusts they are considering setting up that will assist in future tax planning. 

The main starting point for all of the new reforms, centres around whether the farm has a value of £1 million. While this has been a headline for the budget and many farmers will have serious concerns over how this figure may impact their estate planning, small and larger farm owners must also be mindful of planning in case of divorce and how the value of their farm will affect any financial settlement. 

The problems

The manner in which farms are owned can be complex in nature, with ownership arrangements made problematic by the involvement of a business or various family members inheriting different parts and different amounts of the farm. This could result in outsiders, not involved directly in the divorce proceedings to intervene, known as ‘intervenors’ who would wish to ensure that their interest is protected while the matrimonial finances are disputed.

How farms are run can also be complex in nature. All or certain parts may be tenanted, the farm may be benefiting from delinked payments, schemes and grants, subject to planning permission, subject to historic leases, subject to leases that are under review (both of which may impose occupation and use restrictions). 

Farms may also generate income in different ways and different elements of the farm might generate income differently to the other. Many farms are making greater attempts to diversify so the latter is an issue that is certainly becoming an ever more significant consideration when it comes to the difficulties that farms may pose for those associated with the divorce. 

These problems are but a few which can make farms a difficult entity to value and to then include in a dispute over matrimonial finances. 

The importance of the value

With any divorce, the parties are unlikely to reach a settlement without first knowing what financial assets and liabilities each other has in their sole and joint names. However, this applies especially to cases involving a farm where the value can be incredibly difficult to ascertain for the problems outlined above. 

If it is likely that there will be intervenors involved in proceedings, they must be identified at an early stage and the asset or assets over which they seek to claim an interest, in addition to the share of said asset(s) they seek an interest, must be valued as soon as possible. 

A likely issue to arise is also Capital Gains Tax (“CGT”). Again, this must be addressed as soon as feasibly possible for the parties to begin to make informed decisions. Obtaining advice on CGT will also involve the co-operation and agreement of both parties to choose a single joint expert such as an accountant, with the necessary qualifications, to advise on this issue. However, the expert will benefit greatly if they have the value of the farm and the assets involved. 

In short, only by ascertaining the value, will the parties of a divorce be able to realistically obtain a financial order that resolves their dispute. 

How to value 

The parties should obtain the advice of a Chartered Surveyor qualified to provide such valuations and one who is able to take into account all of the many considerations that a farm poses which, it has been established, can be many! 

As with dealing with CGT, the parties should agree to instruct the surveyor on a joint basis. The joint instruction of an expert is of significant importance in divorce proceedings because only then can the evidence obtained be relied upon in Court. Therefore, as the value of the farm is of such importance, the parties should make every effort to ensure that the Chartered Surveyor is instructed by agreement. 

To choose the surveyor, often, one of the parties is invited to propose three experts and their respective quotes for undertaking the valuation. From those three, the other party will choose one to conduct the valuation. If this value is not agreed, second opinions can be obtained by agreement. For the purposes amicable resolution, the parties are also encouraged to share the responsibility of all associated costs, equally. 

Regarding the issue of an amicable dispute, it must be noted that the parties should also assist the Chartered Surveyor as much as possible to allow the expert to practically carry out the work they are instructed to undertake. If there is evidence of conduct that has caused delay the party at may fault may be liable for a proportion or all of the other parties’ costs.

The financial settlement involving a farm

With any divorce case, the section 25 considerations referred to in the Matrimonial Causes Act 1973 (“MCA”) are key to any financial award. This means that any settlement should ensure the needs of the parties will be met following the divorce. Of paramount importance are the needs of the children. 

Negotiations for a settlement must also be balanced with the understanding of case law. Established in the case of White v White (2000), indeed where a farm was at the centre of the dispute, the Court highlighted how achieving a fair outcome was the prerogative of the Court, despite the guidance of statute legislation. The case established that the starting point may be that an equal share is sufficient, but the Court must then consider fairness and needs to depart from equality if necessary. 

The Court will attempt to ensure that the business itself can, as much as feasibly possible, be protected and be allowed to continue to function. This desired aim is of course made more significant and emotive where there are likely to be intervenors who are most likely to be family members of a party to the divorce. 

However, as emphasised in the case of N v N (2001) this is not always possible. With farms there is an inherent difficulty in achieving protection of the business because unfortunately, many farms and their owners are asset rich and cash poor. The possibility of offsetting any financial claim a party may have in the farm is therefore incredibly difficult as selling off specific assets could lead to the farm failing as a business. 

The Court will also need to consider the extent of matrimonial property to reach any decision by understanding what assets are pre-marital and post-marital and again, their respective values. 

Therefore, once the value of the farm, the intervenors and the value of their respective shares, the value of both pre and post marital assets are known; then a solicitor with a firm grasp of the requirement for strategic planning and an understanding of the complexity of farming divorces should be instructed to advise on how to reach a financial settlement that, as much as possible, achieves the balances of fairness and the protection of the farm. 

How to mitigate 

Hegarty strongly advocate that prevention is better than the cure. With the new budget now encouraging farmers to turn to their estate planning, at the same time farmers should not forget to consider planning in the event of a divorce. Whilst it may be seen as an awkward discussion to have, it is much better to discuss what you would want to happen to the farm if the marriage broke down now rather than doing it after the marital breakdown when emotions are likely to be running high. 

While Hegarty is here to assist with any relationship dispute, farmers must consider obtaining legal advice to produce Cohabitation Agreements or Pre-Nuptial Agreements and even Post-Nuptial Agreements that considers the nuances of the farm and affording protection, whatever the value.