Tom’s story

Tom is a farmer approaching 65. He has a 162ha (400-acre) arable operation with a substantial farmhouse, but about 10 years ago he bought a nearby 40ha (100-acre) beef unit. Both farms are run in partnership with his son Andrew who is 42.

Andrew and his wife live in the modest bungalow on the smaller farm, which is now in Andrew’s name. Andrew’s son Connor is in his final year at agricultural college and would like to enter the family business when he finishes his studies.

Tom drew earnings of £25,000 last year, and Andrew drew £20,000, which left the business at breakeven. Andrew’s wife rents out two holiday cottages in the village that she inherited from her parents. Tom also leases one small area of his set-aside to a mobile phone company which pays £5000 a year to site a phone mast.

Tom has recently developed a hip problem, and has been beginning to feel the strain of working full-time. He has also had a couple of disagreements with Andrew who feels that his father has a tendency to act in isolation when decisions are made about the farm.

Tom would like to be able to hand on the farm to Andrew, and take Connor into the family business, but sees little opportunity to do so, as the business cannot sustain a third income.

Solutions

Succession Planning

Tom is planning to cut back his activities on the farm, and hand overall control to Andrew, but is aware that while he remains in the principal farmhouse he may have a tendency to carry on as normal. He is also aware of the potential inheritance tax burdens.

After a review with their financial consultant, Tom and Andrew agree on a course of action.

First, Tom will gift his house to Andrew and vice versa. This has the effect of moving Tom onto the satellite farm, and placing Andrew physically at the centre of the core business, underlining the transfer of control. As these homes are primary residences, there is no capital gains tax to pay on the disposal, but a potentially exempt transfer of the difference in value between the houses is created from Tom to Andrew, so, should Tom survive seven years from the date of the transfer, there will be no inheritance tax liability on that transfer.

Second, Andrew and his wife will draft wills and put in place life assurance so that the cottages pass directly to Connor on his mother’s death, and sufficient assurance is in place to protect Connor from any inheritance tax liability. Tom will also redraft his will leaving his share of the partnership to Connor, to safeguard Connor’s place in the business.

Income

Tom’s pension plans now have a combined value of about £200,000. Tom had always believed that he would have to leave the farm entirely before he could draw these benefits, but after a chat with his financial consultant, he realises that this is not the case.

Tom amalgamates all his pensions into one self-invested personal pension. He vests his benefits, and realises a tax-free lump sum of £50,000 and places the remaining funds into “drawdown”. The lump sum is used to buy a small car, and repay some borrowing, which leaves £20,000 to be used as income this year. Tom then reduces his drawings from the farm to £5000. In future years, Tom plans to draw about £10,000 from his drawdown plan, well within his current maximum income limit, to supplement his basic state pension.

Andrew can then plan to increase his drawings to £25,000, and pay Connor a wage of £15,000.