21 Aug 2018
Common succession scenarios to consider
Every family is unique and so what works for one might not for another. Knowing what the different possibilities are and talking them through is what matters. We spoke to Kite Consulting for advice.
Ensuring the ongoing security and stability of your family should be at the core of any succession plan, says Laura Teasdale, associate and family facilitator at Kite Consulting.
She says: “At the start of the meeting we put a chart of the family tree up in front of everyone to remind them that whatever happens they are linked together as a family.”
Consultants at the company, which has been running succession workshops for young farmers on The Co-operative supermarket’s ‘Pioneers Programme’, then spend time asking family members questions and trying to draw out any elephants in the room.
“Talking things through as a family as early as possible, is critical to good succession planning,” says Laura. “People really struggle with unknowns.”
Below are the most common scenarios and what you can do in each situation. For more information on the tax implications read Tax Planning: Get a grip on tax.
Handing over the farm to the next generation before retirement
This model can work nicely if the parents and successor gradually align, with the parents slowing down and doing less work, while the child takes on more responsibility.
What does not work, says Laura, is if the successor is treated like a worker and not given any autonomy or responsibility until one day the business is suddenly handed over.
“It can be really stressful and overwhelming for that person,” she says.
Knowledge
Doing things gradually over many years allows the younger generation to develop skills and knowledge, while having the back-up and experience of their parents. The older generation benefits from a more phased retirement.
Skills which are lacking can also be identified early.
“You might find Dad is good at bookkeeping but the son is not, so then you might decide Dad will continue to do the books after retirement, or you might get in professional support,” says Laura.
Problems can occur when either party is not ready for the handover – this is where talking needs to happen. For example, if parents are anxious about handing the whole farm over in one go, this could happen in phases.
Lifestyle consideration need to be taken into account too. If retired parents want to stay in the farmhouse, this will need to be discussed.
Property
Similarly, if they move, tensions can arise when the child and their partner moves in and want to change the property. Talking about what is and isn’t okay is important.
Having that conversation early and setting a rough date many years in the future will help everyone prepare.
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Bringing the next generation in as partners to the business
Often, this means leaving the transfer of assets until the death of the parents, while handing over the management of the business to successors.
While this can have tax benefits and protect the farm from division, such as in the case of divorce, it can leave many unknowns which cause stress and disruption for those left behind if plans aren’t talked about openly early, warns Laura.
Essentially, successors and non-farming family members need to know what they will and will not inherit well before the reading of the will.
This will avoid negative situations and shocks, such as where someone has worked their entire life in the business, only to find the farm is divided equally with those who have not. If everyone knows what will happen they can plan their finances and lives accordingly.
Another consideration is timing and how beneficial, or not, it will be for the successor to wait so long to take over the assets. If a farmer dies at 80, their child might be coming up to retirement just as they succeed their parents, by which time they might want to be passing the business to their children, says Laura.
Responsibility
This need not cause issues if the succession is well managed and children who are partners in the business are given enough autonomy and responsibility to make their mark on the business – and know what they will inherit at the end.
Retirement shouldn’t be a surprise for anybody
LAURA TEASDALE
Retiring with financial independence from the farm
Parents who base their retire to provide for them, can risk making the business unviable for their successors.
To avoid this, start by working out what people are going to need, want and expect on retirement, including the kind of lifestyle they want. Then the conversation needs to be had on where that money will come from.
For example, it is quite common for farming businesses to continue to pay power, fuel and heating costs for retired parents, but should it also be expected to pay for a new car? Should non-farming children, who are receiving rental income on a property gifted to them, be expected to contribute?
Have these conversations early and start to make financial provisions, says Laura. “Retirement shouldn’t be a surprise for anybody.”
Financial planning could include; putting drawings into long-term savings and pension pots; investing in insurance policies that pay out on retirement; and investing in property that will provide regular rental income.
Where there is no successor, a farm can act as a pension pot if farmers are prepared to sell, or let the unit. But debt needs to be taken into account. Always get professional financial advice early on, says Laura.
Providing for both farming and non-farming children
The options available in this situation depend on the farm business and assets involved.
Grown-up children tend to be emotionally attached to their family farm and so do not normally want to see it broken up just so they can get their share.
Even something simple like being able to keep a pony in a paddock, or have a family heirloom, can go a long way to making non-farming children feel they are not left out.
Ask everyone what they want, says Laura, and be aware of the language you use: Starting off by saying ‘I want half the farm’, is unlikely to lead to constructive discussions.
Often, the best thing is for the parents to make the decisions, rather than leave it to siblings to sort out.
For example, parents might decide that the child taking on the farm needs to pay out their non-farming sibling, or give them a property.
Options
There are countless options available when trying to provide for non-farming children. These could include:
- Give them a fixed asset: For example, a field or block of land they can rent out or sell off. You may want to agree that the farming sibling has first refusal.
- Invest in property: This could be a property the child lives in, or one that they get rental income from. They could also be given a plot of land to build on.
- Develop a diversification business: This could be a business they end up running, or one that they inherit.
- Leave them a sum of money in your will or an insurance policy that pays out on death: Consider though that this might come later than when the child could benefit most, for example in their 20s and 30s when they want to start a business or buy a property.
- Pay for things to help them get started: This could be university fees, or a house deposit.
Different future scenarios need to be considered and agreed upon also. For example, what would happen if the successor sold some or all of the assets?
Should they be able to cash in all the money just because they inherited the land and leave their sibling with nothing? Should the non-farming child be able to gain if their sibling has improved the value of the property? Should this money be ploughed back into the business or used to buy a property for the sibling? What if the farming business needs that money to survive a rough period or pay off debt?
Talking things through as a family as early as possible, is critical to good succession planning
LAURA TEASDALE
When there is only room for one successor
“This is the really important one to sort out early on,” says Laura.
This will allow children to think about what else they want to do. They might develop careers outside farming, or the farm might be able to help them build a diversification business alongside. This could include allowing them to use farm buildings.
If they want to farm, consider how the farm business could help with a tenancy; perhaps it could share machinery or give them a few head of livestock to start them off.
What to do when there is no successor
Not having a successor is becoming increasingly common as children choose to work outside farming.
Equity
If you find yourself in this situation, try to decide on a date for when you want to stop working and consider these:
- Taking on a share farmer, who could gradually build up equity in the business.
- Selling the farm and assets and using some of the money to help your children in other ways – perhaps with a house deposit or a business.
- Getting a contract farmer in to continue farming the land for a period.
- Leaving all or part of the farm to a long-standing worker who could take on the management and responsibility.
- Whether there are other family members who could be your successor, such as grandchildren or nieces or nephews.
Whichever route you take, involve children in decisionmaking, always have open communication and employ professionals with rural expertise, advises Laura.
Tenancies and succession
Farming tenancies have their own set of rules to consider. Knowing these and planning accordingly is key, says George Dunn, chief executive of the Tenant Farmers Association.
Not all tenancies have a right to succession, so check your legal status before doing anything.
Those that don’t hold a legal right include Agricultural Holdings Act (AHA) tenancies post-1984, county council smallholding tenancies, and Farm Business Tenancies (FBT) since 1995.
Criteria
Be aware that even if your tenancy has a right to succession, this is not automatic and there is a set of criteria that must be met. This includes; that the successor’s principle livelihood has been derived from the farm for a certain amount of time and that they are suitably qualified and skilled to run a farming business.
Normally, this is decided by the landlord, but if issues arise then it can be decided by a succession tribunal.
Foster a good relationship with your landlord and have discussions with them well ahead of time. Identify who the successor(s) will be and get professional advice for how to put a plan in place.
There are no guarantees, but those who have thought about it and planned it early, are most likely to succeed.
Be aware of the important deadlines:
- Succession on death: An application for succession must be made within three months of death. Otherwise, the right to it is lost forever.
- Succession on retirement: Once the tenant has issued a notice of retirement to their landlord, the successor has one month to make an application to take over the tenancy.
Which option you go for is up to you, but planning things properly so there is a tenancy handover on retirement, is much more likely to go smoothly than waiting until someone dies. It is important, however, to plan for an unexpected death, so get a document ready in case you need to make a sudden application.
Relationship
Many tenancy successions are agreed with landlords, but even if you have a great relationship, it is still worth having a document ready for a tribunal should things turn sour and you need the backstop.
Maintaining good relationships with your landlord and planning ahead with good communication is the best approach.
Shape Your Farming Future series
Shape Your Farming Future is a series of informative and practical guides looking in-depth at issues pertinent to farmers when planning for the future.
The four in this series are supported by The Co-Op and look at Succession, Consumer Trends, Skills and Training and Building Resilience.
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