Looking to the future of farming
Whilst we are all coming to grips with the uncertainty and challenging times COVID-19 is having on rural businesses not to mention our everyday lives, now is a good time to consider the future of your farming business.
Succession planning is not just about retirement, it is a long-term plan for your farming business. In order for your farming business to continue to succeed, you need to carrying out a thorough review of your current farming practices, your aims and objectives of your farming business and what resources you may need for that business to continue in the future.
What are your assets and how is your farming business structured? It is important to understand what assets you have and how they are held. Are the assets held personally by you, within a partnership, limited company or trust? Are they used in your own trading business or do they provide a rental income? Not knowing this information could have an impact on your tax position as you could lose inheritance tax reliefs, for example, agricultural property relief (APR) or business property relief (BPR). It is also important to understand if your assets are trading or investment assets.
Each structure whether it be a partnership, limited company or personally owned will have its own tax position. It is quite common for clients to believe that they hold the land as a partnership asset, only to find that it is held by the Partners individually and this can have a serious impact for tax planning and succession issues.
Knowing how land is held is also important when considering your will. Land which is owned personally may be left by will whereas land forming a partnership asset passes under that agreement and overrides a gift in a will.
Until you know what you have and how it is held you can then decide, following professional advice, what you can give away and what you can leave under your will.
Tax Advice Furthermore, it is important to seek advice from an accountant as to tax reliefs. You could lose a relief which may have an effect upon another. For example, a gift of agricultural land can also qualify for hold over relief from capital gains tax (CGT) but a gift of land used for non-agricultural purposes would not qualify.
Gifting assets during your lifetime may seem like the right thing to do but you need to first seek professional advice from an accountant, or solicitor, as there is likely to be tax consequences. Gifts are potentially exempt transfers (PETs) meaning that assets which have been gifted will no longer be counted within your estate for IHT purposes if you die more than seven years after the gift.
Speak to your solicitor Key to succession planning is making sure that all those involved have valid wills and, where appropriate, a farming Partnership Agreement in place.
Family Partnership Agreement Many farms have been passed down through the generations from parents to siblings. If your farm is run by two or more persons you should carefully consider formalising that arrangement by way of a written Partnership Agreement setting out the terms upon which the Partners wish to carry out the business. A Partnership Agreement will clarify what has been agreed by the Partners rather than it being based upon assumptions.
Farming families can sometimes be reluctant to have a formal agreement put in place as relationships are strong and they simply do not see the need to do so but please be aware. Family dynamics change – death, marriage, birth, divorce. Family relations can regrettably break down.
If you do not have a formal written Partnership Agreement in place, the partnership will be governed by the Partnership Act 1890 which provides for a partnership to be dissolved and wound up upon the death or retirement of a Partner. This legislation is outdated and does not reflect modern day farming practices. It is usual that the pPartners would wish for the partnership to continue rather than being dissolved. If it is dissolved it rather begs the question of what happens to the outgoing Partners share or interest in the partnership.
A well drafted Partnership Agreement deals with a variety of matters such as what happens upon the retirement / death of a Partner, how the profits are dealt with, what happens in the event of a dispute, etc. Having it clearly set out in a formal written document will prevent disputes going forward which can only have a negative effect in a family farming business.
Do you have a Will? We cannot stress enough the importance of having a Will in place to document your wishes. Having it clearly documented could avoid possible disputes following your death.
Lasting Power of Attorney You should also consider Lasting Power of Attorney where you can empower someone to look after your affairs should you become physically or mentally incapable of looking after your own affairs.
The way forward
1. Make a list of assets which form your business – are they trading or investment assets, are they owned solely by you.
2. Start the conversation about succession planning.
3. Consider who you may wish to leave your assets too following your death.
4. Speak with your accountant as to matters of taxation.
5. Speak with your agent to seek valuation advice.
6. Speak to your solicitor in respect of your Will, whether you need a Partnership Agreement or Power of Attorney