When farmers retire, the future of the business that has often been their life’s work can become uncertain.
John Robson from Robson & Liddle examines common succession scenarios – and suggests some solutions...
Taking a less active role in the running of the farm while allowing your children to take up the reins can be an ideal way of retiring in stages and at your own pace.
You can also identify and resolve any skills gaps, enabling your successors to ‘grow’ into their new management roles.
It’s also important to keep in mind that enabling your children to take the helm doesn’t necessarily mean giving up ownership of the entire business from the outset.
Management and ownership can – and in many cases should – be treated as separate issues.
By adopting this approach, you can pass on elements of day-to-day management and retain ownership until you – and your children – are ready. Gradual handovers can be done as quickly, or slowly as your family’s situation requires.
Why partnerships are often a workable solution
Going into partnership with one or more of your children is an option favoured by many farming families.
Putting a formal partnership agreement in place is essential if you want to go down this route.
A partnership agreement will allow you to specify whether or not various assets will be owned by the partnership.
If a particular partner retains ownership of land and buildings, it’s important to set out the terms on which the partnership uses this property, as well as what happens if the owner dies or retires.
Taking professional advice means you can make sure your partnership agreement is drafted in the most beneficial way.
Addressing issues of sibling equality
Understandably, farmers often want to treat all their children even-handedly when passing on the family business. In reality varying degrees of involvement in the farm makes it very difficult to treat all siblings with total equality. Fair does not always mean equal.
However, there are a number of options for children who aren’t going to inherit farming assets, such as leaving them property and investments, or a share of the freehold of the farm, received as rental income.
In addition, you can set up a ‘Whole of Life’ insurance policy in trust that delivers a tax-free lump sum payable on your death to children not involved in farming.
Why having a regularly up-dated will is important
Even if you don’t want to pass on the farm during your lifetime, it is crucial for all family members involved in the business to have up-to-date wills. In this way, ownership will go to the right people at the right time.
If you die without a valid will, the courts will determine what happens to your assets, which can cause upset and destabilise the farming business. This can be especially damaging if farming children need to borrow funds to buy out siblings who aren’t involved in the farm.
Tax implications every farm owner should know about
Two taxes are crucial to any plan to hand over ownership of the farm during your lifetime – Inheritance Tax (IHT) and Capital Gains Tax (CGT).
IHT is a tax on your estate when you die. Agricultural Property Relief and Business Property Relief helps to reduce IHT, and sometimes remove it completely from farming and other specified business assets.
Again, the importance of taking specialist advice can’t be overstated as this is a complex area of tax law, particularly for diversified farms.
Capital Gains Tax (CGT) is levied on the sale or gifting of assets whose value has increased after you acquired them.
Sometimes you can claim Holdover Relief if you give away qualifying agricultural and business assets. This means you can defer any immediate CGT liability, with the recipient taking on the capital gain of the previous owner.