Partner Colin Frame shares some thoughts on Farm Succession Planning.
In simple terms when we talk about farm succession we mean the long term plan for the farming business. In practice it is difficult to cover all of the taxation and accounting issues surrounding succession in farming across the generations in one short article, but here goes . . .
It’s good to talk
First a caveat: Over my 25 years as a Chartered Accountant I have seen many farming families wrestle with this subject, most successfully, but there have been some disasters in there too. In the successful cases there exists a willingness to talk about it regularly and often. People’s circumstances change and allowing everyone involved to voice their concerns and hopes often leads to working out sensible solutions that allow things to be passed on when the opportunities arise.
Just as people change so do the tax and accounting regulations and so speaking with your business advisors is important too. Most farming families meet with their accountant at least once a year but having a separate discussion about succession on an annual basis provides a foundation for making decisions. Likewise, when the family decides to make changes, taking proper legal advice and using a qualified land agent is usually money well spent. Please speak with us all before making any significant changes otherwise you could end up with a nasty, and unintended, tax bill! A secondary benefit of involving a third party in any discussions is that they often act as a facilitator and take the emotion out of any talks.
Getting hit by a bus
My starting point for succession planning is to look at what would happen if the “39 bus” came around the corner and killed the current farmers. This would involve an Inheritance Tax (IHT) Calculation which lists all of the assets and all of the liabilities of the unfortunate accident victim. It also then would look at the available reliefs which might reduce the value of the assets – Agricultural Property Relief (APR) and Business Property Relief (BPR). Both of these, if assets qualify, would reduce the value of the asset in the deceased’s estate by 50-100%. These reliefs are very valuable and care needs to be taken when making changes in a farming business to preserve them. These apply to both landowners and tenants and, where they are available are an extremely useful tool in passing assets on. Once you have quantified the potential value of the estate we would then look at the Will which sets out the deceased’s wishes in writing. It always alarms me when a client says they don’t have a will because it means that assets could go to places that they might never have intended and worse might leave the grieving spouse with much less security than they would have wished. All family members should have a will and should review it every few years to make sure that it still does what it is meant to.
If there is IHT potentially to pay then the family could consider taking out life assurance which would pay out a lump sum to cover the debt. This can be for as long as is needed and buys some time to look at changes which would minimise the IHT payable preserving the underlying assets for the family.
Once you know what you are dealing with and what the various family members are thinking you can then usually look at some “quick wins” thrown out by the process of going through the “39 bus” scenario. These quick wins vary from client to client but can be as simple as an amendment to the will which passes more assets to the surviving spouse. Assets passed to your spouse or civil partner are exempt from IHT on the first death but will mean that the surviving spouse might have an IHT problem when they die. Or it could be bringing the farm cottage onto the Balance Sheet so that it is part of the overall farming business allowing you the opportunity of claiming APR/BPR. While talking about simple wins, if you have a pension this should also be reviewed regularly. Following wide ranging changes in legislation surrounding pensions made in April 2015 it is possible to leave your pension fund to the next generation. It needs to be a modern pension scheme to allow this flexibility and it requires a form to be in place indicating to the pension trustees your wishes on who should benefit from the fund on your death.
Once you have tackled the quick wins you then need to redo the calculations and see if you still have a problem. If you do, then you need to tackle the thornier issues – please don’t ignore them or put them onto the “too difficult” pile of papers on the farm desk. Inevitably when looking at the bigger items there will be a question as to whether you should gift away assets from your ownership to someone else. When gifting anything away you need to be aware of Capital Gains Tax (CGT), Stamp Duty Land Tax (SDLT in England) and Scottish Stamp Duty (LBTT) as these are potential traps when making gifts or transferring assets.
Dealing with CGT the current rates of tax are not a great barrier to transferring assets – 10% and 20% for individuals (28% for certain residential property and for trusts) as compared to general income tax rates of 20%/40%/45%. There are also some reliefs available which might mitigate any CGT payable including Holdover Relief where any capital gain is held over until the asset is disposed of by the new owner. Holdover Relief is a useful relief to access but care needs to be taken as it is not available on every business asset or disposal.
To conclude my experience can be summed-up as “Plan for the worst and hope for the best!” The earlier you start in succession planning and the more you involve the generations the likelier you are to end up with a solution that suits everyone and the family still speaking. Start early, take good advice when needed and regularly review to make changes when it is sensible to do. Don’t forget about the tax and legal implications, always speaking to your advisers before doing anything major!