Planning for the future of your farming business is not just about retirement. It is a wider-ranging process that allows the transfer of skills, knowledge, control and ownership to younger generations, and, as such, it cannot be done without thorough consideration.
Make a plan
As you may know, succession planning for farmers can be complex. Many issues are time-sensitive, and early legal, tax and financial advice is crucial. Discussions about the business’s future goals and which family members wish to be involved will be essential to prepare a strategic business plan.
Early planning can highlight flexible opportunities to transfer assets and land immediately, or to gift or sell assets and land in stages over several years. It can also protect older generations, ensuring their future accommodation is secure even if they are no longer part of the business.
Possible future structures
One fundamental aspect of succession planning is to determine whether the current farm structure is still appropriate. For example, how are the assets owned? Who occupies the land and on what basis? Is there a farming tenancy?
Succession planning offers an opportunity to consider different structures and their suitability for long-term business success. The traditional farming partnership is still an option but other structures such as companies, limited liability partnerships (LLPs) or limited partnerships may be appropriate.
Tax issues
Another core issue where expert advice is needed is tax – in particular, inheritance tax (IHT) and capital gains tax (CGT).
Agricultural Property Relief (APR) and Business Property Relief (BPR) from IHT may be available but the application of both will be subject to rigorous assessment by HMRC. It may be prudent to pass down assets in your lifetime, and not just on death, to make best use of such reliefs.
Gifting assets to family members may trigger a CGT bill, but as with IHT, reliefs may be available on qualifying agricultural and business assets. It may be possible to claim Hold-over Relief to defer the CGT payable when gifting into certain types of trust, but expert advice will be needed.
Non-agricultural assets and investments
Many farming succession plans need to provide for children who do not want to be part of the business. Pensions, life assurance and long-term investments can play an important part here, and financial advice will be helpful.
Wills and legal rights
To pass on your assets to your chosen heirs, you should ensure your Will is up-to-date. You should also be aware that in Scottish law, notwithstanding the terms of your Will, children and spouses are entitled to make a claim on the estate known as ‘legal rights’. Legal rights is a claim based on the net moveable estate, meaning all bank accounts, shares and so on, less any expenses.
A legal rights claim does not normally apply to land and buildings, meaning you can pass these on intact in your Will. However, if you hold land within a business, it is effectively converted to moveable property for the purposes of calculating legal rights. As a result, a farm may have to be broken up to settle a claim. Arrangements can be put in place to try to overcome this conversion but there are no guarantees.
In conclusion, each family farming business is managed and run in a different way and the length of time it takes to plan for the future will depend on many factors. When considering succession planning, it is imperative to involve your solicitor at an early stage to achieve the right outcomes for you and your family – not just those who want to farm, but those who don’t.
This article was written in conjunction with Lynsey Kerr, Partner in our Private Client Services team and is featured in the Autumn 2019 edition of LandBusiness magazine.