Reasons to address farming succession grow stronger
© GNP The combination of rapidly falling Basic Payment Scheme income, tax certainty for the time being and the changing demands on land use and policy make it even more pressing to consider the long-term future of farm businesses.
The growing number of succession cases ending up in court are a further reason – these are costly, stressful, time consuming and generally do lasting damage to family members and to the business.
Mark Weaver, managing director of rural business consultancy CLM has seen a greater willingness to open the discussion recently, although for far too many families it remains the elephant in the room.
See also: Court awards farm to son in inheritance promise dispute
“Whatever political persuasion the next government is, the signals are that inheritance planning is only going to get harder.”
The further reasons he suggests to address succession include:
- Getting it right allows the more senior generation to step back, while allowing the younger one to take on more responsibility at a time that’s right for them
- Most farms are better, more profitable, more resilient and nicer places to work if everyone is clear about the future. This is important for staff recruitment, retention and motivation as well as for the farming family
- Sound succession planning gives clarity of direction, peace of mind and a new focus which can re-energise a business
- Banks will be keener to support a business with a secure long-term plan and where it is clear that succession has been properly considered.
Essential questions to address
A succession strategy should ask:
- What role will each member of the family play now and in future?
- How will the farm’s assets be owned?
- When is the optimum time for the older generation to take a step back?
- What do the next generation want to do? How can they be given enough responsibility initially to make a meaningful difference, without jeopardising the business if they make a wrong decision while on a steep learning curve?
The resulting strategy needs to cover the long-term direction and structure of the farm or estate, the ownership of assets, the mix of enterprises, investments and pension provision, education and training and, critically, the tax position, so liability to inheritance tax and capital gains tax is minimised.
Source: Mark Weaver, CLM
“Preparing for succession isn’t about squeezing out the older generation or undervaluing their contribution,” says Mark.
“Far from it. It’s about making sure everybody is doing what they are best at – and what they want to do – for the overall good of the business and everyone associated with it.”
Acknowledging that it can be a difficult and emotional topic to broach, he suggests that one option to set the ball rolling could be to write to or email family members.
“If you see them every day that might sound odd, but a letter would allow you to set out your perspective and your points in an organised and calm way.”
It can also help to have an independent person in the room when discussions get under way – whether a professional such as a consultant, accountant, lawyer or a trusted family friend.
“What’s vital is that everyone understands their own aspirations and those of the other people involved.
“Being motivated by wanting to grow bumper crops of wheat or prioritising biodiversity are equally legitimate aims, but everyone must fully appreciate all the pros and cons of the different options and how they interrelate within the jigsaw puzzle that is successful succession.”
Relief
Once they start the process, many farmers feel a weight has been lifted from their shoulders, says Mark.
Nick Dee, farms and estates partner with accountant Hazlewoods, says many are looking at the question of succession more seriously.
“This is partly because of concerns about viability with losing basic payment, partly because the relatively benign tax regime may not always be with us, and partly because some farm diversification enterprises and some longer-term environmental schemes may affect the trading status of the farming business.
“It takes time to develop a succession plan and in changing times the plan needs to be kept under review.”
If there is a viable business, he suggests the current farming generation should think carefully before allowing or encouraging the next generation to join or take on the farming business as there are implications for all concerned. This includes the current farming generation, family member(s) coming back to be involved, and non-farming children.
“This is not to say do not do it, but there are implications.
“For example, you cannot farm on too much borrowed money, so the chances are a disproportionate amount of capital will have to go to the farming child or children, and the older generation will still need somewhere to live and something to live off.”
It is important to ensure that assets are owned by the right people before doing something that may either change the value or the use of an asset and hence its tax status.
“A good example would be if there was the opportunity for large-scale solar, to make sure the asset is transferred into the right ownership, ideally before it increased too much in value and certainly before the land stopped being farmed.
“Holdover relief from capital gains tax is valuable.”
Nick offers a starter checklist of questions for parents considering succession:
- Is there a viable farming business to pass on?
- How important is it to you to preserve the farming business?
- What will you live off in your old age?
- Where will you live?
- How can you be fair between children?
- What can the next generation contribute to a farming business, and what would be a fair return?
Legal considerations
Assumptions and expectations on the part of either generation can cause complications and poor succession outcomes, so it’s important to be clear about everyone’s aims, objectives and plans, says lawyer Richard Miller, agribusiness partner with Burnetts.
This means that communication is the key to the process.
However, there are still occasions when no-one knows the contents of a will except the person making it, and there is a reading of the will at a solicitor’s office following their death.
“It shouldn’t happen like that,” says Richard. “There should be no surprises.
“A genuinely good succession is the best work we do. Part of the process is asking ‘what if…’ questions so that possibilities can be catered for.
“You need to ask different questions at different stages in life.”
However, succession issues often arise at certain trigger points such as a falling out or a divorce, prompting reflections and sometimes some hasty decisions.
How new partners join a business needs careful consideration, says Richard.
“A son or daughter can join a partnership and be invested in the business and the decision making while at the same time the real assets can be ringfenced to protect them through the risky years of early responsibility or a recent marriage.”
Personal and partnership assets are often confused or misunderstood, so in planning succession, it’s important to establish who owns what and therefore what anyone is entitled to leave in their will.
For example, assets can fall into the residue of an estate if not carefully catered for and therefore can end up in the wrong hands despite best intentions.
Leaving a life interest in a farming business to a son or daughter, with the farm assets in trust for the grandchildren is an option, but Richard points out that an issue with this route is that one would struggle to raise bank finance when they only have a life interest in a property.
He also suggests that anyone who has made a will should read it every year and review it every three to five years. Also, he says that anyone who has not made a will should do so.
Advice from Business Clinic
Do you have succession questions? Farmers Weekly’s Business Clinic expert panel may be able to help with legal, tax, finance, consultancy and land management advice.
Write to Business Clinic, Farmers Weekly, Quadrant House, Sutton, Surrey, SM2 5AS or email fw-businessclinic@markallengroup.com setting out your question as clearly and as briefly as possible.