The UK’s privately owned rural and urban estates (often known as ‘landed estates’) serve as a reminder of our history and our technological progress. They are testament to the fact that land has long been and remains a highly prized asset class.
Typically, a privately-owned estate will hold adjacent areas of land and buildings that are managed in a co-ordinated way for the benefit of a single family, whether that be immediate family members or a more extended group. However, there are considerable forces driving fragmentation of an estate into smaller and smaller parcels of land and individual buildings. If you look at estates over the centuries, they have generally succumbed to these forces to varying degrees.
Whilst resisting fragmentation is challenging, the estates that survive and thrive today are those that have managed to organise the most effective resistance. In our experience, the benefits of resisting fragmentation are:
- Synergy: Adjacent areas of land and buildings can be managed together to produce an overall effect; something more coherent and productive than fragmented individual plots and buildings. Value can be created or preserved for all stakeholders if an estate can be kept together.
- Critical mass: To achieve its objectives, an estate must be self-sustaining. For example, a family member who inherits a large stately home will require an endowment to fund it. If the endowment is to be the income from the surrounding land, then the surrounding land needs to be sufficient to fund the home. The same concept applies to funding a family, a top-quality management team and philanthropic aims.
Of course, there are times when fragmentation is the best option and the considerations of synergy and critical mass are outweighed by other needs of the family or the business. In that situation, it will be important to plan for fragmentation to happen in the best way possible.
Keeping estates together has always required careful navigation of a number of challenges – for example, managing succession, financing capital taxes, modernising estates and protecting their heritage.
As part of these challenges, principals and management across the UK are now facing these difficult questions:
- How can we remain a sustainable business?
- How can the estate best serve its owners, its employees, its business partners and its wider community?
The answer to all these challenges remains the same – a willingness to meet them head on and with an anticipatory approach and clear communication. In our experience, it really is true; proper planning prevents poor performance.
Whilst the challenges for estates are diverse, the recurring themes are unchanged:
- The family – funding, involvement, succession, family taxation
- The business – efficient, profitable, acceptable risk, business taxation
- The future – sustainability, wider stakeholders, purpose
We elaborate on some of these below.
Clearly having more than one owner can cause fragmentation. Historically, the main solution to this has been to concentrate the succession of an estate down a single family line through the system known as primogeniture. Where this approach is taken, there are other strategies to consider, such as how to manage issues of fairness and the use of trusts to try to spread other commercial risks arising from single personal ownership.
Since the advent of companies and other possible estate ownership vehicles, it has become more feasible to have more than one owner while avoiding fragmentation. This approach uses the company to keep the estate together under a unified management and strategy, while the wealth may be divided among family members through them having shares. Again, complementary strategies are needed, the main emphasis being to ensure that the shareholders are all pulling the business in the same direction. Sometimes the answer lies in buying out dissenting interests, but more often clear and regular communication of the estate’s strategy, values and purpose with all generations can mitigate the risk.
In both cases, protecting against unforeseen fragmentation, such as divorce, is increasingly being considered. Pre-nuptial agreements as well as family constitutions and ‘bad-leaver’ provisions are all now considered viable options to mitigate the risk of a family splitting up the estate.
Financing inevitable tax liabilities is yet another challenge for estates. Where tax exposures can be identified and communicated with principals and management as soon as possible, the modern estate can look to diversify – for example into tourism, energy, natural capital and other sectors – and/or sell parts of its non-core portfolio to prepare for an inheritance tax event. To supplement these strategies, estates can explore borrowing options, which can often be privately raised on excellent terms.
From a tax perspective, even minor changes to key tax reliefs (such as Agricultural Property Relief "APR" and Business Property Relief “BPR”) could have a significant effect on estates. But appropriate planning can help mitigate the impact of such changes. One simplistic yet effective way to manage modern threats is via a risk register, detailing each possible and actual risk to the estate, its likelihood and its potential impact. If regularly reviewed and updated, this risk register can become an essential tool to help an estate be more future focused.
Serving all stakeholders
A key challenge for all businesses is staying alive to modernisation and societal change. This is made significantly more difficult for estates, many of which are so intrinsically linked with the past.
An estate, like any business that wants to thrive, must realise the needs of all its stakeholders and respond accordingly, from the owning family through to the community that live and work on and around its property. Positive engagement with tenants and local communities can ensure that an estate remains a key part of the community.
In recent years, this has often manifested in the estate’s team being at the heart of local business initiatives – helping to boost the footfall and perception of parts of their portfolio, providing land for public use and facilitating upgrades to telecommunication equipment. Successes should be celebrated and many estates use social media as a cost-effective way of communicating these with stakeholders.
To efficiently and effectively meet the needs of stakeholders, planning is key. Serving all stakeholders is often expensive and time consuming, but mapping their needs and impact on the estate and using this information to shape management decisions can help to ensure that costs are best allocated.