Boring but essential: Factoring tax considerations into succession plans is paramount to avoid nasty and expensive surprises, says Gary Markham, Land Family Business’ director of farms and estates.
Succession planning can take a wide variety of routes, each with their own set of tax considerations.
Broadly speaking, there are two main options, which themselves can have many variations depending on circumstances:
Farm assets are not passed on until the older generation dies. Successors are often brought into the business through a partnership agreement, allowing parents to keep control of assets but release the management of the business.
There are several tax advantages of this model: Inheritance Tax (IHT) can be planned for during the owner’s lifetime. Also, if assets are revalued when someone dies, a free uplift means there is no Capital Gains Tax (CGT) to pay if the asset is subsequently sold.
Furthermore, the farm can own let properties, which receive 100 per cent tax relief. These can be used by the business or to provide for non-farming children in a will. There is a possibility IHT would have to be paid, but currently an individual can pass an asset worth £325,000 to their children without them having to pay IHT. This is double for a married couple, including if one person has already died.
It is essential, however, to ensure all paperwork is consistent, including your partnership agreement, annual accounts, will, and a share agreement if the business is a limited company. Use the same lawyer for each and ensure they and your accountant are rural specialists. Not clearly showing who owns what is the biggest mistake you can make.
An outright gift will have an element of risk in terms of CGT and also potential divorce. However, it is possible to gift certain assets, such as let buildings, into a trust or to an individual.
For tax purposes, those assets in trust are considered to be outside the individual’s estate when they die. The trustees, which often includes the previous owner, decide when the ownership of the asset is released to the next generation.
As long as the asset is worth no more than £325,000 there is no IHT to pay and CGT can be held over into the trust. This can be an effective way to gift a property, for example, to a successor where a parent is worried who they might marry and how they would retain the asset, should that relationship end.
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.