Charlotte Nock, a Legal 500 recommended specialist in Wills and Estate & IHT Planning and Amy Husk, a specialist in agricultural land and commercial property, look at why succession planning should be firmly on the radar of farming businesses in 2021.
For most of us, including the farming community, 2020 was a difficult year.
2021 brings its own challenges with changes in government farming policy and agricultural support as well as of course the impact of COVID-19 and Brexit. The current tax framework is beneficial to famers and landowners. However, as we wait to see how the Government plans to pay for the mounting COVID-19 bail out debt, and with changes to Capital Gains Tax (CGT) already on the cards, many fear an increase in taxation generally, particularly in Inheritance Tax (IHT).
Moving forward the focus for the agricultural sector will be on improving profitability whilst navigating the potential significant changes in the economic landscape. This will involve sound forward planning and developing a road map for the future.
Succession planning is an integral part of this process. Managed successfully this will ensure the smooth transition of a farming business to the next generation. The result will be a more sustainable, profitable business for successors which can survive undamaged by unnecessary taxation. Good succession planning will also give all involved in the business a clear sense of purpose, peace of mind about the future as well as reflect the joint aspirations of all involved.
So how do you get started?
The most difficult step for many families is actually starting the conversation. The earlier you can have this conversation the better. It is vitally important that everyone that might be affected is involved. On-going communication and discussion within the family is equally important to ensure that succession planning is a dynamic process and not just a one-off conversation.
In our experience, it is also extremely helpful to involve an expert in succession planning who can take an objective view and identify what is important to each family member and ensure that momentum is maintained and the correct steps taken.
Consider the facts
The first phase of developing the plan is to consider all the facts and ask important questions such as:
- Who owns the assets of the farm?
- Who occupies the land and buildings and on what basis?
- What does each member of the family require from the farm?
- What is the long term focus of the farm and its business?
- What role does each member of the family play now and what is their future role?
- What training or support will be needed to give the younger generation the skills and experience to drive the business forward while the older generation takes a step back?
- How will the transition of responsibility for the business take place?
- Do we have Wills and all the other necessary legal documentation in place to protect the business?
Make a Will and consider a pre-nup
A key part of any succession planning is making sure that all members of the family involved in the business have valid Wills which reflect the aims and objectives of the agreed strategy.
If a farmer dies intestate without determining the distribution of assets and the farm business itself, the rule of intestacy will apply. In this scenario the farm and its business will not be passed to successors, but could potentially be broken up, and the tax burden on the estate increased.
Pre-nuptial agreements are becoming increasingly popular and can help protect a farming business’s assets should a son or daughter divorce in the future.
Review tax planning
Inheritance Tax (IHT) and Capital Gains Tax (CGT) are the two key taxes to consider. In addition, vehicles such as trusts can be used to positively impact the amount of tax that will need to be paid when handing on assets:
- Inheritance Tax (IHT): This is a complex area and is made more so by the increasing numbers of farmers that are diversifying their business activities. With the increases in IHT anticipated, it is important to use all available reliefs such as agricultural property and business property relief to minimise or eliminate IHT on any qualifying business assets.
- Capital Gains Tax (CGT): Disposing of assets can trigger a CGT bill. Reliefs are available and with the changes to the CGT regime, specialist advice should be sought.
- Trusts: It is important to hand over assets in a way that preserves the continuity of a healthy and sustainable business and setting up a trust can allow you to achieve this.
- Life Interest Trust: These trusts allow the benefit of assets, such as land or a business, to pass to one person to use during their lifetime, and on that person’s death, the Will can then stipulate that these assets should pass to another person or people.
- Discretionary Trust: These are extremely useful when a priority for the farmer is to ensure flexibility as to how assets are used and who should inherit these assets in the future. As they allow executors and trustees to make the best use of any available tax reliefs, they can be a very effective tax planning tool.
Taxation is a complex area. For detailed advice on tax planning, please contact a member of Girlings’ Wills, Tax & Estates team.
Formalise the legal structure
As a family business, many smaller farm businesses often do not see the need for or have never made a formal farming partnership agreement or shareholders agreement in the case of a company. A written partnership (or shareholder) agreement, even if you are just a husband-and-wife operation, is important for business continuity. It will allow a business to continue to function, as it gives a surviving partner the right to access joint bank accounts and can help stop banks freezing assets until probate is granted. This will also ensure that ownership of the business ends up in the right hands at the right time.
Diversification is increasingly a critical part of farming businesses and it is key to ensure the right structure is in place for the diversified aspects. Understanding the property and land ownership and re-structuring that where needed should be high on the agenda. There may be a need for Farm Business Tenancies and / or business leases for different parts of the business, particularly where different family members may have responsibility or ownership of different businesses.
Whatever else COVID-19 has taught us, it has highlighted the need to have a plan to preserve continuity. It is never too early to start discussing farm succession planning and when handing over the family farm, you only get one chance to get it right.
With recognised specialists in different fields of business and personal law, Girlings works with farming families to develop and implement successful succession plans and can help you and your family develop yours.
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