Succession planning isn’t just about preparing for your retirement, but a business health check to ensure a smooth transition of control of your business, putting it in the best position to succeed long after the next generation takes over
Why is a farm business succession plan important?
A succession plan will enable you to set out your goals for your farm business as well as how and who you’ll hand over all control to. It’s also your opportunity to shape the future of the farm and leave a legacy long after retirement.
The number of farmers planning to cut back on the hours they work or cease altogether has risen to 28% from 20% last year according to NFU Mutual. As a result, succession planning Is increasingly important. Despite this, 35% of 1,654 farmers surveyed don’t have a succession plan in place – that’s a worrying statistic.
Without proper succession planning, farmers could find themselves without a home, a livelihood or means of income. It can also threaten the UK agricultural sector, which currently contributes £11.2 billion to the UK economy (0.5%).
What you need to consider when building a succession plan
The farm team of trusted advisers is key to a viable and agreed plan for the future and so is the “buy-in” of all those involved who might be affected.
The specifics
Before you put pen to paper, it can help to sit down and have a discussion about the specific details your succession plan will contain. A good starting point is to undertake the NFU business health check.
In structuring a plan you should try to include everyone who might be affected by the discussions. It would be a good idea to bring in a specialist adviser at this stage, who can help to explain the best way to move forward and set out all of your options clearly. A specialist adviser can lead the team and identify areas where expertise is needed.
This might include how you go about dividing up your farm fairly – you’ll need to think about land, buildings and machinery and the value to be attributed. You should also consider how it currently operates and who manages each aspect, the long-term business goals of the farm, the goals of those from different generations who are involved in the farm and those who aren’t, and how you plan to achieve them. What happens to living arrangements? You’ll need to think about this if a residential property is on the farm itself.
Handing down the farm doesn’t necessarily mean giving all the assets away on day one. If you are retiring, you might want to give the day-to-day management to your family now but keep ownership of the assets until a later date.
Financial arrangements
As well as ownership and future goals, you’ll also need to think about the different financial and tax implications that your succession plan might trigger. For example, inheritance tax (IHT), capital gains tax (CGT) and pensions.
Farmland held for decades will have increased significantly in value, and capital gains tax may be an issue if assets are given away or sold for development for example. We can advise on the options available to gift or sell assets in the most tax efficient way.
The financial aspect of succession planning can be tricky to navigate and make it off-putting, so we suggest you seek professional guidance, particularly if inheritance tax is a worry as our team can help to minimise the amount absorbed by taxes and advise you on how to gift assets to your family.
Settling expectations
When a farm business has been in the family for generations, the situation can get messy when trying to please everyone whether they are involved in the business or not.
If some family members decide they aren’t interested in owning the farm or to be involved in the farm business, you will need to discuss what they may receive. This can be determined based on the value of the farm and the business, what the business can afford and what the family member would accept. Consideration also needs to be given to what claims family members may have if they are to receive less than others, and how that is best managed.
To prevent any family disputes like this from happening, you should set funds aside for those who don’t want to take the business on and make sure you’re setting up pensions early.
Broken promises
Promises are sometimes made and later broken and usually there is very little anyone can do about this. However, in certain circumstances, and specifically in relation to land or property, it may be possible to bring a claim to enforce a broken promise, known as a ‘proprietary estoppel’ claim.
A son or daughter might make a ‘proprietary estoppel’ claim on the basis that their parents had assured them on numerous occasions that they would take over the farm within their lifetime. But once the parents retired or passed away it was given to someone else.
Proprietary estoppel is a complex and evolving area of law and we cover it in more detail and look at a recent case here.
Arguments about succession planning can ruin relationships, but if you make plans early, you can make sure everyone’s on the same page and take steps to prevent that.
Communication and Documentation
So many succession failures in the context of farming are based on poor communication so ensuring the involvement of those affected is key and recording the expectations and arrangements made to meet them is essential for business resilience through the succession plan:
A succession plan should be the map to the arrangements you need to make. A detailed plan should consider how the family and business is constituted so that all the documents match up in order to minimise the chances of the plans failing through misunderstanding, contest and error.
The Thrings Private Client team are experts in succession planning and writing and the structures and documents necessary for peace of mind. We work extensively with rural businesses and look forward to assisting yours or those of your clients. Find out more here or contact Andrew Morris or Mike Westbrook