Business Clinic: How do we structure our business/succession?
© Joe Blossom/Alamy Stock Photo Whether it’s a legal, tax, insurance, management or land issue, Farmers Weekly’s Business Clinic experts can help.
Conor Melvin, associate at Thrings, Carly Drummond, senior tax manager at MHA and Joe Spencer, partner at MHA, advise on the tax implications of development and quarrying interests and changes to family ownership structure.
See also: Business Clinic – brothers disagree on sale of inherited land
Q: My wife and I farm as a partnership. Our three children, aged 38 to 42, do not have a passion for farming, but they do have good business acumen.
I own our main farm of 168 acres on the urban fringe. We also have a 63-acre holding, of which 33 acres is in the joint ownership of my wife and myself. The remaining 30 acres and farmyard, which controls access, is in my sole ownership.
All of the smaller holding has commercial development and mineral extraction potential. Interest has been shown for quarrying the jointly owned land, with the processing and stockpiles to be sited on my farmyard. The mineral extraction will be leased on a royalty basis.
It seems obvious that we form a corporation for the mineral operations.
Also, a housebuilder would like to take an option on the main farm in my sole ownership.
Financial advisers suggest we incorporate the whole of our land assets and farming business, as incorporating partnership assets would not be liable to capital gains tax and stamp duty land tax.
The company structure is attractive due to the tax savings to be made as a private limited company.
We are unsure how we can gift shares equally to our children, gradually passing the business on as there is development potential on all the land we own.
Over the past years I have used all my entrepreneurs relief and we have jointly almost used all our inheritance tax (IHT) relief through gifts to children, mainly in property outside of the farm – we just need to live for seven years to avoid any IHT!
So far we can’t see a downside or complication to incorporating all assets, except for losing personal control. While our accountant is most positive towards incorporating all the assets, both our lawyer and land agent are advising caution on this. Please advise.
A (CM): As farmers seek new income streams through diversification, we are increasingly seeing partnerships incorporating as new companies.
This is often driven by tax considerations, but here we will focus mainly on other legal aspects following incorporation.
Incorporating a partnership involves a transfer of assets from the partnership to the new company which must be carefully documented, partly to enable you to access the relevant tax reliefs covered elsewhere, but also to ensure the company begins on a sound footing.
When it comes to gifting or issuing shares in the company to your children, you have a number of possible options.
For example, you may wish to gift them shares now (perhaps increasing that percentage over time) or put shares into a trust for them.
The inheritance tax and estate planning implications will need to be considered, but a key driver will also be the level of involvement you intend them to take in the business now.
Measures to govern how company is run
If you do gift them shares then, as the shareholding owned by the children increases, your personal control is likely to decrease.
You need to carefully consider what measures should be put into place to regulate how the company is to be run and ensure these are documented in the company’s articles of association – which are essentially the written rules about how the company is to be run – and in a shareholders agreement.
The remedies for breaching each document are different, so it’s often best to have both in place working in tandem.
Through those documents you could protect the level of control in a number of ways, including restricting the voting rights of the shares to be held by the children, and stating that certain decisions – such as a land sale – can be taken only with your consent, or by a specified majority of shareholders.
You can regulate who has the right to be appointed a director and to specify what happens to shares on the death of a shareholder, with a view to keeping them in the family.
Share classes decisions
You should also consider whether all shares should be created equal; you can attach different rights to different share classes.
For example, if you are the one who has introduced capital into the company, you may wish your shares to have enhanced rights to capital upon a winding up or return of capital to shareholders.
Different share classes could also carry different dividend and voting rights. A carefully considered approach can therefore help to mitigate the concerns around loss of control.
As with any major business decision, it is essential to be clear about what you want to achieve from the outset, and to ensure your interests, those of the business, and your relationships with family members are protected.
A (JS and CD): The point in question here surrounds incorporation of a farming enterprise, where there is some core farming activity but also some commercial activities which perhaps present more favourable financial opportunities than the farming. There also appear to be development opportunities.
Potential taxes to consider here would include a wide range from possible capital gains tax (CGT) and stamp duty land tax (SDLT) on incorporation, but also VAT, income tax, corporation tax and inheritance tax (IHT).
To answer this fully, we would need to understand the overall level of trading activities in the farm pre- and post-developments.
As the situation covers multiple taxation and lifestyle matters, careful consideration is required to ensure all objectives are met here. Planning is essential, as is consideration of the bigger picture on succession.
Tax liability assumptions
If there were to be an incorporation of the partnership, there needs to be a thorough assessment of the qualifying criteria that may allow for reliefs on the transaction against CGT and SDLT.
It is a sweeping statement and a bit worrying to assume an incorporation would automatically result in no liability to these taxes. A full review of the current position is needed to confirm whether this is in fact the case.
Further, if you were to proceed with incorporation, getting the accounting entries correct and the relief claims registered will be crucial in not falling foul of any anti-avoidance provisions.
There might be concern over the incorporation of the main farmland where there is interest from a house builder.
You would need to be comfortable that, should the land be transferred into a corporate structure, the potential gain arising on sale would be “locked” in the company, subject to corporation tax and then further income tax on the extraction of the proceeds of the sale into individual hands.
However, if you wished to retain the proceeds of the sale in a corporate structure and reinvest (potentially claiming rollover relief from CGT), then a full incorporation may be advisable.
If reinvestment of the proceeds is not an aim, leaving the potential development land outside of the incorporation should be considered.
Some or all of this land could be gifted now – on the basis it is used in a trade – and continue to be farmed by the company via a contract farming agreement, perhaps with the children holding the land in partnership.
This might be an option if you were looking to pass the value of the potential future development to the hands of the children where they can benefit from using their own business asset disposal relief (BADR) limits, assuming the criteria can be met.
This could result in the smaller holding which includes the commercial development, potential quarrying and mineral extraction being incorporated.
This may offer a continued income stream for the current owners, and consideration could be given to the IHT exposure of ownership of the company.
A form of family investment company structure might be considered to allow for “freezer” and “flowering” shares, dictating where value growth occurs.
These terms relate to the structure built within shares where their value can freeze at a certain level, or can flower in comparison with others, in terms of their underlying value.
This is potentially beneficial for income tax and family estate/succession planning to mitigate IHT.
Certainly, gifting within a corporate structure to the family members might be an easier process; gifting say 5% of a shareholding is easier than 5% of a piece of land.
Gifting of shares can cause some tax issues should the company not be trading as, if it is, you would usually rely on gift holdover relief.
Be clear about family’s aims
The answer will depend on the objectives and drivers of the family. Which taxes do they wish to mitigate in priority?
You could end up chasing a 10% or 20% CGT rate, only to be parking a potential 40% IHT issue with an individual.
With the children being adults, presumably with families, there may be opportunity to involve some trusts too in order to pass value down a generation, if this was a desired outcome.
Again, plans would need to be considered now to deal with any ownership changes prior to developments happening.
Passing on ownership now is good IHT planning, but it does have the effect of moving value into your children’s estate for the purposes of divorce, for example. A trust would be one way to mitigate any risk of exposure.
In summary, there are a lot of moving parts here and a clearer idea of your precise aims will be needed to make a more complete recommendation.
We need to consider practical implications as well as the tax costs of the various options.
Diversification where there is no clear farming succession is a great way to achieve an equitable outcome for your successors.
A lump sum coming in relation to the residential sale and ongoing income from the commercial and mineral enterprises will hopefully give everyone something to work towards.
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