Farm succession planning is a tricky business at the best of times, but having the key documents in place, including a Family Business Action Plan, will make navigating a clearer path for handing over the baton from one generation to the next much easier.
John Rouse, a tax and succession expert and Partner in the Rural Sector team of law firm Lodders, explains why.
Until recently, the tax applied when passing on farms from one generation to the next was benign, and Inheritance Tax (IHT) wasn’t too much of a problem.
However, this is all set to change, with farmers living longer and holding onto their farms until they die. It is not so much about supporting the older generation into retirement – after all, farmers rarely follow a traditional retirement – but instead, encouraging them to have all the documents in place to create a comprehensive and effective succession plan.
Some key steps to get your succession planning in place include:
1. Partnership agreements
If you are in a partnership, make sure you have a partnership agreement, because if you don’t, on your death the partnership finishes under partnership law, and the partnership bank account will be frozen. The absence of a partnership agreement presents one of the biggest and most common problems reported by banks of family run and owned farms – if there is no partnership agreement, the banks are limited on the extent of the help they are legally able to provide when a partner dies. Drafted carefully, the partnership agreement will help allow the bank to keep the partnership bank account open when a partner dies, so that bills and financial commitments will continue to be met, securing the sustainability of the business. The partnership agreement must be reviewed regularly to ensure its relevance to the family and all its members.
By making a will, you ensure the right assets pass to the right beneficiaries. In addition, with the help of a tax expert and adviser, the will can be drafted to ensure the estate is passed on in the most tax efficient way possible.
3. Lasting Power of Attorney (LPA)
An LPA allows you to appoint people that you trust, rather than leaving the decisions to others or indeed even government organisations, giving you certainty over who will deal with your affairs in the future if one of the farm’s partners loses the mental or physical ability to manage it. Written whilst you have mental capacity, an LPA can promote and ensure the farm’s survival. It is easier for legal representatives to deal with matters with an LPA than through the Court of Protection, which can be a time consuming and often costly process.
Review your trading structure and business. With appropriate advice you can achieve substantial tax savings by using all the available tax reliefs appropriately. It is vital to have the right structure in place if you have a trading business and certain non-trading activities.
5. Tax efficiency
By bringing in the next generation early, there are additional tax benefits available, so that partnership profit can be shared in a tax efficient way.
6. Family Business Action Plan
Create a plan that reflects the family’s shared vision and values, and its approach to owning and running the family business. The plan can be as short, long, formal or informal as you like, but will be a start in capturing the family’s thoughts for the future.
Features and benefits of a Family Business Action Plan
The main aim of a Family Business Action Plan is to clearly explain what is to happen to the farm.
It should include common provisions, such as the nature of the business, long-term goals, family member’s obligations and duties, and procedures if decisions can’t be agreed.
Importantly, it should also set-out what happens on retirement, or death of members of the family, or for individuals who simply want ‘out’ of the business.
The plan acts as a framework to set out the planning objectives for all the family to buy into, so the family can then deal with the day to day planning and running of the farming business.
See also: Writing a business plan
One size doesn’t fit all though, so it’s important for the plan to begin with the structure of the farming business itself, as explained earlier. Family farms can operate through different trading vehicles, the most common being a general partnership.
Once the Family Action Plan is written, it must be shared with all the family, and then regularly checked and reviewed so it is always bang up to date and reflective of the current operation and structure. The plan should be modified to include any changes such as births, deaths, marriages or divorce.