Tips on succession planning for farming families

Many farming family businesses are being held back by inadequate succession planning. Suzie Horne looks at some of the options.

Increased profitability in 2007 and 2008 means succession planning is being taken more seriously as people return to the family farming business after a spell in other careers.

“Historically the industry has not been great at planning,” says Carl Atkin of Bidwells. “There are plenty of cases where grandfather still controls the cheque book. This creates a problem both for children and for the retiring generation and inhibits proper planning.”

Key problems include a lack of clarity on roles, responsibilities and objectives and historic structures that often don’t suit current needs. There is also the problem of too many generations/parts of family trying to get a living from the farm and having all these individuals can tie the hands of those farming.

The key challenges for these businesses is to try and get people to think five to 10 years ahead and ensure the retiring generation have adequate pensions. This means establishing a family ownership and occupation strategy.

Where to start?

The start of any business plan is to get a clear record of the current position – draw up an accurate schedule of what there is now and its current value, advises Mr Atkin.

It is useful to understand how the current set up has come about and this can lead to some surprises in terms of who owns what. Businesses often develop in an ad hoc way and it is often unclear what are partnership assets and what is owned by individuals or companies.

“For example a, b and c may be in the partnership but a, b, c and d might own the land. Clarification of who owns farm improvements, entitlements, quotas and abstraction rights is also important.”

Land and property may be held by one party or entity and farmed or occupied by another. “You may need to unravel some things. For example, a farming company or partnership may not have an agreement to occupy land which it has been farming for years, particularly if land has been added to a holding, or rents may be at low historic levels.”

As well as land and property assets, machinery, livestock, growing crops, cash, mortgage and other debts should be listed and valued.

Lack of clarity about borrowing can delay or complicate restructuring, so check borrowing arrangements – whether it is secured against land, whose responsibility it is to discharge borrowing and whether title is held by the person or party taking the loan?

“It’s not unknown for a loan to be taken out by the partnership and then for an individual to find themselves responsible for it. Also consider off-balance sheet assets, the Single Farm Payment for example, or the value of a tenancy.”

Next step

The next step is to start to understand what the various parties want and need from the business and the property. The biggest hurdle will usually be how to provide for a retiring generation and or non farming family members.

“The retiring generation often has no idea just how much it costs to run a house, paying rates, running a car, possibly paying rent. You need to budget for this to be able to plan,” says colleague Jeremy Procter.

Individuals must be honest about ambitions and objectives, which do not always turn out to be what other family members expect, he warns.

“It’s important to establish a family strategy and have periodic family meetings, but these must concentrate on major issues and not get bogged down in minutiae. Set an agenda and time limit. An independent third party can be useful to ask the direct questions which everyone else tends to skirt around.”

Once everyone’s objectives are clear, consider whether to keep things together as one business or to split different business interests. “Establish clear lines of responsibility for individuals, allowing capacity and experience to be built,” suggests Mr Atkin.

For those with development or potential development land, or a diversified business, there is more flexibility to provide for those not directly involved in the farming business, through gifts of residential or other property, or by their taking on an alternative enterprise.

“You need to plan to get the operational part of the business into the hands of the person doing the farming,” says Mr Atkin. “That way, the farmer can get on with the farming – he can’t sell the land, but is free to run the farming business.”

Land and property can be transferred into a pension fund, through a Self Invested Personal Pension (SIPP), which can also hold cash and other assets including non farming investments. Farming members of the family can then farm the land, paying a commercial rent to the pension fund, which in turn pays the pension. SIPPs involve costs and regulations, but can be a very tax efficient means of providing retirement income.

Wills should be drawn up alongside restructuring plans, remembering that marriage revokes a will. Both wills and retirement plans must be reviewed regularly.

Restructuring options

• Splitting land ownership and occupation – land can be owned by several family members, but not all need to have a direct input into the farming

• Contract farming agreements or FBTs can allow those not directly involved in the farming business to earn a return from the farm

• Occupation of land and/or use of farming assets can be limited to a number of years, or to a lifetime

• Rent might be at market rate or discounted

• Consider the best business format and different parts of it – sole trader, partnership, Limited Liability Partnerships, or company

• Profit shares can be flexible, for example phased up or down over an agreed timescale or according to performance

• Assets do not have to be given outright – can be transferred in stages by gift or sale to family members

• Trusts have a place, but are less tax efficient than they used to be so are less commonly used now – family companies may be an alternative

• Pre- and post-nuptial agreements can be used to protect family assets

• Retirement offers tax breaks – tax relief on pension contributions and Entrepreneur’s Relief from Capital Gains Tax effectively brings CGT rate down to 10% on qualifying disposals

• Consider life insurance to provide cash for non farming family members who cannot otherwise be provided for

Pitfalls

•Beware – timing of gifts and other arrangements can have big tax consequences – including Stamp Duty Land Tax

• Wills must deal with entitlements, otherwise they form part of residue of estate and could end up in hands of a party with no land

• Co-habitation does not confer same rights as marriage

• A lease can devalue freehold

• Make changes carefully to avoid loss of tenancy succession rights

• Lifetime gifts are only exempt from Inheritance Tax if giver survives seven years

• Despite frequent warnings, many families still risk loss of Agricultural Property Relief by leaving the older generation in the farmhouse and giving away land

• Asset transfers should be properly documented, relevant authorities notified, such as bank and in some cases, the RPA