Window of opportunity

The landed estate is perhaps the earliest type of family business. Traditionally, large tracts of land with associated buildings - the main hall or house, farm buildings and let cottages - were owned by one family, run by the estate's factor or agent, and passed from eldest son to eldest son down the generations.

Today, both urban and rural estates must be on the front foot to prosper in today's challenging economy and survive the ever-increasing welter of legislation.

This type of client and manner of dealings can be seen in ITV drama Downton Abbey. Lord Grantham is head ?of the family but his agent seemingly takes the bulk of the work and decisions while the lord entertains lavishly, dealing with 'matters on the ground' via his London lawyer.

He is, however, a kind and considerate owner and perhaps fails to see that the estate can no longer stand on its own two feet, propped up by the investments in his US wife's marriage settlement.

In the last series, the fictional estate needed a shake-up and kindness had to move over for business-like actions and profitability. Even they, in the post-first world war era, knew that for Downton to survive, it had to work its assets harder, but within the confines of the responsibilities the family felt it owed to society, the locals and, importantly, its tenants and staff.

This has also happened in many real landed estates that are now run much more as businesses, than just the recipients of rents from subservient tenant farmers.

Cash is king

Cash flow is everything. Many estates have historically been viewed as asset rich and cash poor. Nowadays every effort is made, if necessary and in some cases to the discomfort of the owners, to find sources of revenue that are sustainable, to rein in expenses and focus on overall return. The assets concerned must be worked hard: each must play its part. Annual budgets, projected out to five or ten years, and often with longer cash flow models are now commonly adopted.

In lots of cases, the hall or family home is now opened to the public, whereas in the past (and still for some of the richest estates) this was vigorously resisted. Nowadays, families will accept some level of public access: weddings; viewing the family's art collections; festivals, flower events or car rallies; or simply exploring the perfectly maintained gardens.

The landed estate has had to accept that even the 'big house' may have to pay its way. In some cases this does not necessarily generate a significant revenue stream, but for a property of significant heritage and cultural importance, inheritance tax (IHT) at 40 per cent can be saved by claiming conditional exemption on the house or its contents or art, such that public access for a number of days can be permitted.

Exploiting planning opportunities is now considered de rigueur, particularly for land on the periphery of the estate. Losing a couple of fields on the edge of a nearby village can generate significant profits, if the local planning policy permits a 50- or 100-house development.

Structuring such a transaction so that land is owned in the correct entity is essential for tax protection, as well as potentially earmarking the cash receipts for other purposes - be that to reinvest in the estate or to set aside as a nest egg for school fees or an approaching tax charge, or for family expenditure.

Many estates have carefully audited their property portfolios. Aside from the main house, smaller properties are now exploited in a far more business-like way. (See top picture and below for an example of a large-scale project.)

Keeping up appearances Graythwaite, on the western shore of Lake Windermere, has been home to the Sandys family for over 600 years. The country estate, set in 5,000 acres of lakeside, forest and woodland, has a rich heritage, including literary connections, and today supports a thriving residential and working community. The renovation of Silverholme, a fine Georgian manor with uninterrupted views of England’s largest lake, is the latest in a line of projects undertaken by the family to diversify and modernise the estate to ensure its survival for future generations. The year­long transformation, completed in November 2012, has restored the manor house into a ‘home away from home’ for luxury stays, and private and corporate events. It blends period character and modern luxuries, offering receptions rooms, eight individually styled ensuite bedrooms and the original coachmans’ cottage, gardens and private access to Lake Windermere. Softwood chippings from the estate’s trees supply a 100­kilowatt woodchip biomass boiler, producing the heating and hot water, while the house is also preparing to unveil its own water turbine to provide all the electricity needed to run Silverholme and its surrounding buildings. Discreetly located, the turbine is one of two new installations being installed on the Graythwaite estate and, together, they will generate a further stream of income for the estate. Along with Silverholme, the estate also hosts 20 self­catering holiday cottages, 50 tenanted properties, and a successful sawmill business.

Even smaller, redundant buildings can play their part: over the last generation we have seen a significant number of barn conversions, turning rundown old buildings into profitable ventures for the owners, whether as residential properties or business units. Successful farm shops or similar ventures have been set up in former barns, whether run by the family or, more commonly, third parties.

Lakes and rivers are converted into fish farms; gravel and sand extracted where possible. Forestry is also big business, with estates selling forward to take advantage of the relatively high prices for timber. Properties have been done up, with loans where necessary to command better rents and, by default, better quality tenants. In some cases, old Rent Act tenants have been encouraged to move, if appropriate alternative accommodation is available.

For the farms themselves and over the passage of time, many of the old-style Agricultural Holdings Act (AHA) tenancies have been replaced by new tenants on the more IHT-efficient farm business tenancy.

It is a testament to the owner/agent who maintains a workable relationship with their existing tenants that many are now agreeable to seeing their AHA tenancies re-granted, such that rights of succession and other favourable elements of the AHA tenancy are preserved, but as a tenancy granted after 1995 it now commands the ?100 per cent IHT rate for agricultural property. All of that achieves a more commercial operating system, as well as securing tax advantages.

In a number of cases, we have seen the tenants themselves looking at diversification and this can require some diplomacy in dealings. The landowner may not wish much non-agricultural use, as that will impact their agricultural property relief and, possibly, on their lifetime planning if the capital gains tax holdover relief afforded to gifted agricultural land was denied ?or restricted.

However, they appreciate that the tenant may be struggling, with falling revenues following two wet harvests, increasing costs of employment and input costs, reduced subsidies and fearing the impact of CAP Reform, and thus practically the owner may allow diversification. It may be that, adopting their more corporate approach, a new structure is assumed, such as adding some properties to a company structure, to enable diversification at the tenant level without a risk to the tax reliefs for the landowner.

The borrowers

Borrowing is now encouraged in many cases. Over the years it has proved that sensibly applying borrowed funds generates greater return in the long run. As general principles, borrowing should be modest in loan to value when looking at the total value of the estate, but can improve cash flow provided there are clear ways for repayment, such as self-amortising loans.

The recent changes to IHT relating to debts taken out by estates or businesses to reinvest in the estate were not welcome news to the landed estate and business community. HMRC was seeking to disapply the IHT deductions that were afforded when a property that does not attract IHT relief (e.g. the main home) is used as security for borrowings that are then used on other projects, whether to enhance or repair farmland, let cottages, or to inject funds into one of the businesses.

After some lobbying, we have more clarity when such loans will still secure IHT advantages and it is critical that estates are alive to the issue as the correct paperwork with the bank will be critical when the IHT is levied.

Other estates are aware that the tax incentives of holiday lets are being constantly withdrawn by HMRC. First, the income tax reliefs and now, following the Pawson case, the potential restriction of IHT relief for all but the most actively run holiday cottage businesses.

However, the more diverse estate run as a commercial business rather than a number of separate assets, has more chance of being viewed by HMRC as a business. This was following the Farmer and, more recently, Balfour cases, in which the courts held that an estate, when all its components were taken together, is a business running all of its various operations - some more profitable than others. Such a business can thus secure relief from IHT.

As a result, it is all the more critical that the assets are worked together, and appropriate accounting and minutes will be essential in debating the tax relief with HMRC when the time comes.

The bulk of the estates in trust now face the added burden of a charge to IHT of up to 6 per cent every ten years. While generating an extra 0.6 per cent of return every year may appear a reasonably achievable challenge, without a business plan, profits once received can simply be ploughed back into the estate (or, worse, seen by the owner as an unexpected windfall and suddenly earmarked for a personal expenditure). It is critical that sufficient cash is available on that ten-year anniversary to meet the IHT, and estates must plan for that accordingly.

Board control

Estates have become more corporate, often being run by a 'board', of which the patriarch is now perhaps the managing director or chair, with a qualified business person as the chief executive officer. He (or increasingly she) may be a surveyor or agent, or in some cases an ex-City accountant or other businessperson, and now takes the helm in terms of strategy.

Rather than all assets being owned outright, trusts, partnerships and corporate structures are interleaved to take advantage of tax breaks and to limit liability where an operation carries any risk, in the same way a trading house in the City or a trading business incorporates to secure such protection.

It is also essential that the business plan identifies which assets are playing their part. There may be obvious reasons that an underperformer is retained. For example, the family home provides accommodation for the owner yet generates little return in most cases, ditto for the art collection. The owner needs to be ruthless, and commercial, in deciding which assets are key holds, and thus identify others to prop those up financially. A sound, strategic business plan is vital.

Reinvestment is crucial, and without this estates will flounder and die. Critical mass is also important. Without a spread of investments and appropriate diversification, a family can be too dependent on the vagaries of just one type of venture.

A ten-year minimum plan is essential, but it should not be totally reliant on the estate itself - ideally at least 10 per cent of the estate's value should be in an investment fund, whether held as investments or in properties earmarked for sale. Every estate needs its rainy-day fund and short-term access to cash to retain overall flexibility.

Fail fast

Not all ventures work and estates have been quicker to recognise that: fail fast ?is a new motto. It is better to try, but ?not all ventures will succeed, for reasons such as economy, location, weather or public sentiment. The modern estate needs to acknowledge that one of the new ventures will prove to be the estate's cash cow in years to come, but it needs to identify which will, and importantly which will not, and take action fast.

Ultimately, in the same way as ?a business needs a backup plan, asset management and a proactive approach is the only way to survive. Urban estates perhaps provide more opportunities ?for income returns and higher yields than rural estates, if only because sentiment contributes so much more ?to the latter.

Whereas an estate with an ?urban asset class can take decisions more ruthlessly and with less emotional attachment, the rural estate cares ?more about retaining certain properties and, above all else, preserving the ?family's home.