How a business LPA can provide farming continuity

A lasting power of attorney (LPA) allows a trusted person (or a group of people) to make certain decisions on your behalf if you are unable to.

There are two types of LPA documents – one covers health and care decisions, and the other, financial decisions.

Ayesha Brown, partner with Ashtons Legal, says it is less well known that separate LPAs can be set up for financial decisions, allowing the appointment of different attorneys for personal finances and business affairs.

The latter version is often referred to as a “business LPA”.

See also: Reasons to address farming succession grow stronger

Why consider a business LPA?

A business LPA allows a business owner (described as the “donor”) to appoint an attorney or attorneys to make financial decisions on their behalf, which are limited to their business interests. 

The LPA can take effect immediately following registration should the donor wish, authorising the attorney to attend to any matters they are directed upon, should the business owner become mentally incapacitated, or is absent travelling.

Without an LPA and depending on the structure of the business, it may not be possible for family members to continue with the operations of the business.

For example, they would be prevented from accessing the business bank account, or from authorising payments in the event of the mental incapacity of the person who usually has that responsibility.

Although many would choose their spouse or children to take decisions about their personal finances, they may feel they are not the right people to run their business.

“Perhaps they don’t have the knowledge and capability to do so, or the donor does not wish for them to be burdened with this responsibility and may feel it is appropriate to appoint other people with greater business experience,” says Ayesha.

“They [business LPAs] can often suit farms which have diversified enterprises, with perhaps different limbs of the family taking a lead on differing parts of the business.”

Prior to October 2007, documents called enduring powers of attorney (EPA) were used to cover financial decisions. It is advisable that these are reviewed to see whether they remain fit for purpose.

Under what circumstances is a business LPA useful?

It is important to consider the business structure and make sure the business LPA dovetails with, for example, any existing partnership or shareholder agreements.

Partnerships: What should happen in the event a partner becomes incapacitated may be addressed in the partnership agreement, but there may still be a need for a business LPA to address certain provisions.

However, not everyone has a written partnership agreement and even those who do may not have covered the possibility of mental incapacity. Where this is the case, the agreement should be reviewed.  

If someone is in a partnership with their spouse and children and would intend to appoint the same attorneys to cover their business interests as their personal financial LPA, then there is no need for a separate business LPA.

The one LPA for financial decisions may be all that is needed in such cases.

Sole traders: The risk facing sole traders without an EPA or LPA in place is that if they are incapacitated, or absent for a long period where they may not be easy to contact, then there will be no one with the authority to run their business.

Even if they have a trusted employee or friend willing to step into the breach, if these individuals do not have power of attorney then they would not legally be able to carry out any financial transactions.

An LPA therefore allows the business to continue to operate normally until the owner has returned or recovered, or if that is not going to happen, the attorney can arrange matters for the future of the business. 

Companies: An attorney’s authority will not extend to a donor’s duties as a director, as this is a personal appointment that can only be carried out by the director holding that office. 

However, there is need for an attorney to exercise the voting rights held by the donor – as a shareholder – to remove the incapacitated director and appoint others to act in their place.

The newly appointed directors can then make decisions for the business.

Where a business only has a small number of shareholders, their operations could be jeopardised where one of them is unable to act.

This could arise, for example, if the governing documents require unanimous shareholder consent for certain business decisions.

The situation is more risky where there is a sole director, as without someone named as an attorney, there would be no one with the authority to keep the farm running.

In such instances, the only option would be for the next of kin to ask the Court of Protection to appoint a deputy to act on the business owner’s behalf.

“This is a cumbersome process, which can easily take between nine to 12 months, perhaps more, due to the Court of Protection’s backlog, and it is expensive,” warns Ayesha.

“It is not a nice process and one to be avoided at all costs.”

What can the attorney do?

The functions an attorney might be authorised to carry out include paying invoices, wages, tax and VAT, making decisions on sales and acquisitions, hiring or firing staff, managing health and safety issues, discharging debts and handling the future of the business, including succession.

They carry a personal responsibility to act in the best interests of the donor, subject to any restrictions or conditions within the power.

They should also take heed of any guidance given in the preferences section of the document.

This is when the input of a legal adviser can be crucial as a poorly drafted LPA can lead to an overlap between personal financial affairs and business LPAs, and so to ambiguity.

What’s involved in the process?

The application form for setting up a business LPA is the same as the one used to set up a personal financial affairs LPA.

The court fee for registration of each power is £82 and applicants should expect to wait at least 20 weeks for their application to be processed.

It is advisable that the other partners or directors should know where the original copy of the LPA is held, who is the appointed attorney and how to contact them.

Family members should ideally also be aware that the LPA is in place.

A copy of the full document will need to be made available to any organisations that the attorney will need to deal with such as the bank, HMRC and the Rural Payments Agency.

Bank and tax issues

Keith Phillips of accountant Duncan & Toplis warns that banks are becoming more stringent in insisting that when a person passes away the sole trader or partnership bank account is frozen until probate is established.

“This action is also coming into use when a person, for whatever reason, can no longer operate as a partner or run their sole trader business, perhaps due to ill health,” he says.

“Having a business LPA in place has the very simple effect of permitting the business to continue when otherwise a bank would, if they became aware of a serious illness, potentially freeze the bank account for the ongoing partners.”

He advises that it should also allow the attorney to access any savings funds the affected partner may have in the business to help fund themselves and their family at what is most likely to be a critical time.

Keith also points out that having a business LPA can be helpful for inheritance tax (IHT) planning.

“From our perspective, the continuation of the trade for a person is vital.

“If they are deemed to have left [the business] after an accident or illness, it might suddenly mean their wealth that had been covered by business property relief may have been turned into a loan, which would no longer be relievable.

“This a major risk when, say, someone has a stroke and then passes away some time later. Using any method one can to keep that person part of a business can save significant IHT.”