Farm succession: Expert advice to ensure a smooth path
© David Barley/Alamy Stock With farming being more than a business for most families, it can be difficult to put emotion to one side when planning for succession.
However, thinking strategically can achieve an outcome that will allow an enterprise and its people to succeed both now and in the future.
While every situation and family is different, it is not uncommon for farming families to find discussions around succession very tricky, says Joe Spencer, a partner at accountant MHA.
See also: Reasons to address farming succession grow stronger
Because of this, families often underestimate how long the business succession planning process can take.
“The emotions of the oldest generation may be very different to those of the youngest,” said Joe.
Communication across those generations is key to a successful succession.
“Make sure that the expectations of successors and their siblings are clear and plan accordingly. Have open and honest conversations and transparency from the start,” he said.
Succession planning key points
- Tax is important, but should not be the main driver
- Communication is key – expectations should be made clear
- Planning can take a long time – start early so that all options can be explored
- Fair and equal are not necessarily the same
- Resist saddling the business successor(s) with obligations that threaten the viability of the enterprise
- The older generation’s income and housing needs must be provided for – and consider potential care costs, too
- Trusts can help protect assets – choose trustees carefully and don’t be afraid to change them
- Even when it seems things are stalled, there may be more options than you think
- Succession can begin or be achieved without handing everything over
Dividing the assets
Mark Charter, a partner at Carter Jonas, suggests all parties must find areas of compromise and common ground, including how assets are passed on to farming and non-farming children.
It is rarely possible to divide inheritance equally between successors, therefore fair doesn’t always mean equal when not all siblings are involved in the business, Mark pointed out.
“If parents are looking to leave the farm to their children they might want to do so in unequal shares to reflect the value and the earning income that the sibling who is farming has foregone by working in the business.
“It’s not unreasonable to have an outcome where you have an unequal division, but leaving it all to one sibling and cutting out the others is not the right outcome either.
“It is finding some middle ground and making sure you have explained your situation to all of the siblings, and that it is well documented.”
The share to the child who is working on the farm should perhaps include the house they are living in, as well as land, he added.
How to distribute assets fairly between farming and non-farming children is a question that solicitors like Sam Doherty, a partner at law firm Thrings, are most often asked.
As the purpose of succession is mostly to enable the business to continue operating in the future, stripping it of its assets to make the division fair and equal is likely to put it under financial pressure.
“Dividing the business up and taking some of the land away from the farm will potentially stop it being viable,” warned Sam.
Limited company
Different corporate structures, such as creating a limited company and giving non-farming siblings a different class of share, can be a solution.
This will enable the non-farming siblings to have an interest while allowing the farm to continue to operate with the assets in place.
“By giving shares to non-farming children they can benefit from the success of the business via income or capital,” said Sam.
However, Mark warned against giving excessive control to non-farming children and, as a consequence, creating a barrier to the farming sibling being able to operate and control the business.
When passing assets on, parents should consider the security of their own home and their income.
Control of process
They may want to retain an element of control by taking different steps towards succession over a number of years.
Sam said there are many ways the younger generation can become involved without the parents losing all control by passing everything over.
“That way you can make sure that the younger generation is up to the job and that you are going to be able to carry on in the lifestyle you have been accustomed to, while still bringing them through the business.
“You don’t necessarily want to hand over control to an untested child until you know they can do a really good job of it and bring the business through the way you want them to.”
Tax considerations
Tax should never be a sole driver for succession planning – Mark advised against letting the “tax tail wag the dog”.
“No-one want to pay too much tax, but keep everything in perspective for all eventualities and outcomes before you make big decisions about handing everything over.”
Engaging professionals who can guide and advise can make the process smoother, including a financial adviser to help work out the future financial needs of the donors.
In situations where none of a farm owner’s children are farming, but are to be given the holding and do not want to sell it, how it can be passed on is another area that needs careful thought.
One option is to partition the farm to give each sibling direct ownership of their share.
“It is far easier than giving them joint ownership which just kicks the can down the road because at some point they will have to come to an agreement on how to split it and by then there may be grandchildren involved,” said Mark.
Overage can achieve fair distribution of windfall gains.
An overage provision across the whole farm can give fairness and protection to all the children.
If one of the owners then strikes lucky on their share, for example from a solar scheme or housing development, the others can profit from it as well.
From a tax perspective, capital gains tax partition relief is available.
It is important to understand that if one of the older generation becomes a retired farmer in the eyes of the law without passing on assets they will not be entitled to tax reliefs.
It is therefore important that the business structures are correct, and that there are regular partnership or board meetings with the farmer in attendance and minutes taken of those meetings, as well as the farmer being part of the decision-making processes.
“The way it has been described in some of the tax cases is that he was a farmer, he looked like a farmer, he spoke like a farmer, he dressed like a farmer, so you are ticking those boxes at every stage to build up the evidence trail to make sure you have the qualification for tax relief,’’ said Mark.
Trusts can be useful
Assets can be passed on through a trust, removing them from the estate for inheritance tax (IHT) purposes while retaining an element of control.
Thrings partner Sam Doherty said this can be beneficial compared to gifting, as trustees have control over the asset.
This safeguards against situations such as the person you have gifted the asset to divorcing, and the consequential loss of some of that asset.
A classic example of when a trust is used is when assets are being passed on to unmarried children.
“It gives a bit of control, a bit of protection, rather than a direct gift,” said Joe.
However, there are tax consequences to putting assets into a trust so it is important to get good advice, to make sure it fits your circumstance.
Once in a trust, the donor can’t be a beneficiary of an asset otherwise it would be classed as a gift with reservation of benefit.
Trusts can be expensive to manage as there are legal costs associated with running them and, if there are professional trustees, there will be administration fees, too.
Who the trustees are is important also, said Carter Jonas partner Mark Charter.
“Choose trustees carefully so they will act with probity and with due regard to protecting and doing the very best for the beneficiary’s interest, but equally for the direction of travel for your farm, your estate that’s in the trust.”
He recommended changing trustees periodically.
“The trustees can almost become embedded and too settled in the role, it’s a given, and their interests and views tend to almost look upon it [the asset] as their own.
“Having a rotation and a change is no bad thing.
Watch the Business Clinic Succession webinar.
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