A number of fundamental issues are all-important to the smooth running of family businesses, but in many cases they have not been addressed or what is in place is not effective.
Gary Markham, director of farms and estates at Churchgate accountants, highlights the key areas.
How much tax should you or your business be paying? Corporation and income tax rates vary between 20% and 62%, so whether you are a sole trader, a partnership or a company can have a significant effect on the overall business tax bill and therefore on the cash available.
2. Plant and machinery
Annual investment allowances have now dropped from £100,000 to £25,000 a year and writing-down allowances have gone from 20% to 18% for general machinery tax pool assets and even lower for other assets.
Businesses may therefore need to look at new ways of funding plant and machinery, in particular using contract hire agreements. While contract hire equipment won’t appear on the balance sheet, 100% of the charges are allowable as a business expense.
3. Managing people
The greatest influence on the profitability of farming businesses is normally the people involved, whether owners, family members or staff. Family annual general meetings and staff appraisals with set objectives often increase profitability.
Setting aside a proper time and framework for such meetings is essential for every business but is so often lacking.
Review the structure of borrowings carefully – in 80% of cases they are incorrectly set up, risking a higher inheritance tax (IHT) bill than necessary.
The value of assets for IHT purposes can in some circumstances be net of the borrowings secured against them, so it is crucial that borrowings are secured against the right assets.
5. Entrepreneurs’ Relief
This is a huge opportunity and can reduce the rate of capital gains tax from 28% to 10%. It can be relatively straightforward to arrange ownership of assets to meet the conditions.
It is essential that tax planning is started at least 12 months prior to exchange of contracts to ensure that the assets being sold qualify for Entrepreneurs’ Relief.
6. Succession planning
This is a big issue with many considerations. From a tax perspective it is possible in many farming businesses to mitigate IHT liability by way of tax reliefs.
These reliefs are, however, only available to specific business structures and, again, this requires time for planning.
7. Non-farming family members
There are straightforward ways to distribute assets between farming and non-farming family members but, as land prices increase, this is a growing challenge. Planning for this usually involves investment and life policies funded by the business.
Buying houses to rent out, developing business interests outside farming or putting life policies into trust can help build a fund or contingency for payments or gifts of assets to non-farming family members.
8. Power of attorney
It is recommended that a power of attorney is put in place for the elder generation in a farming family.
Elder generations who often remain partners for capital tax purposes may form a block on decisions if illness affects their capacity, and particularly where there is a family dispute.
Wills should be reviewed regularly to ensure that they reflect current wishes. In addition, reviews should be conducted on significant events such as marriage or the birth of children.
Ownership of land and property should be checked to see if it is held as joint tenants or tenants in common. Assets owned as joint tenants automatically pass to the other owner(s) on death, which may not be the current wishes of the owner, or may conflict with the terms of their will.
Consider writing life policies under trust for a nominated beneficiary – this can save inheritance tax.
10. Partnership agreement
Partnership agreements should periodically be examined to ensure that they dovetail with the terms set out in the partners’ wills. What the partnership agreement says will override the will.
Another aspect to consider is protecting assets in the event of one of the partners suffering a divorce. Consider what partnership agreements provide for on the death, retirement or serious illness of a partner – is it what the partners intend?
It is also important that partnership assets and personal assets are clearly identified.The wording of partnership agreements can affect the availability of tax reliefs.
More on this topic
Why farming partnership agreements are important