Following a clear process for closing your business will make it emotionally, legally and financially easier for all involved, legal experts have stressed.
Tom Hewitt and Sian Edmunds, solicitors at law firm Burges Salmon, said there were a range of factors which needed careful consideration when winding up a farm business.
Here, they examine the main issues to focus on.
For a sole trader, this may be straightforward, but for partnership or company structures, it may be less obvious. The farm, for example, may secure partnership debt, even if the farm itself is not a partnership asset.
Business accounts and the partnership agreement – if there is one – are a good starting point to determine who owns what, but they are not always conclusive.
Many farming accounts show the land as an asset of the business, when often the people involved consider the farm to be owned by one of the family, or the partners.
Plan whether the business and all its assets need to be sold. Sometimes, this may mean it needs to be broken up into lots beforehand, or whether there is someone who would buy the farm as a going concern.
For example, there may be partners or shareholders who are already involved in the business who may be the most logical buyer.
In the case of a partnership, what is the basis of valuation when one partner retires and another wants to acquire his or her share? A well-drafted partnership agreement will outline this.
It may say land should be considered at its book value rather than its current value on the open market. This could mean a continuing partner can buy out the retiring partner’s share of the farm at a fraction of its current market value.
Alternatively, if the agreement does not include the basis of a valuation, historic asset values listed in the farm business accounts do not necessarily equal the wind-up value.
Tax is a big issue. The sale of livestock may be free of any tax if the herd basis applies. But, where the farm itself is being sold, Capital Gains Tax (CGT) needs to be planned for at an early stage. For those aiming to continue farming, CGT rollover relief should be available.
If proceeds are not being reinvested into farm land or another trading asset, entrepreneurs’ relief will attract gains at just 10 per cent as opposed to 28 per cent. Given the rise in land values over the last few years, claiming entrepreneurs’ relief could make a sizeable difference to your tax bill.
And tax does not stop with the sale of a business. While the farming business continued, most farmers will have benefited from generous rates of Inheritance Tax (IHT) relief.
But if you cease farming and do not reinvest the proceeds in qualifying assets, what may be an attractive balance in your bank account will not be eligible for any IHT relief.
If you are a tenant farmer, you will want to discuss surrendering your tenancy with your landlord. But on what terms? Will the landlord make you a surrender payment? Or is there a deal to be done on dilapidations or improvement compensation?
Wills must not be forgotten. It may well have made specific gifts of the land or farming business which will no longer be relevant, or do not tie in with provisions of the partnership agreement.
You could easily find proceeds from the sale of the farm would be divided in a completely different way to what you intended, or you face a dispute over which provisions should prevail.