Succession planning is about more than retirement. It’s also about ensuring the long-term success and protection of your business and its assets.
When it comes to succession planning, many people think you have to be nearing retirement to get the process started. However, succession planning is about more than retirement. It’s also about ensuring the long-term success and protection of your business and its assets.
For this reason, succession planning should be an ongoing and frequent discussion that starts as early as possible. Families should communicate openly and honestly about their wants and expectations for the future of the business, to ensure that everyone’s interests are aligned as much as possible.
When should I start succession planning?
Every business is different and run by a unique group of individuals. For larger, more complex businesses, a succession plan can take up to 20 years or more. It involves major ongoing decisions on the long-term plans for the business, how assets are owned, the role of each family member, and much more.
Starting early gives you time to create your plan. But it also gives you a significant window to train and prepare the next generation to take over. Taking time to equip them with the necessary practical skills and industry knowledge will help you feel more confident when it comes time to handing over the farm.
The first steps in succession planning
Many business owners find introducing the conversation about succession planning difficult. This could be due to family dynamics or the concept of facing one's own mortality. You may even feel reluctant to hand over a business built up over many years of hard work. Try not to think of succession planning as a negative process, however. Try to rather see it as a necessity to ensure the future success of your business.
From the outset, it’s important to encourage an honest and open discussion. A number of different people may have aspirations to be part of the business. On the other hand, those that you had assumed would take an active role may no longer want to do so. It can be difficult to make decisions around family, but the key is to leave emotions at the door and do what is best for the business, which starts with clearly outlining everyone’s objectives and expectations.
Ensuring the best future for your business
Family units are ever changing. When you’re creating a succession plan, you need to remember there may well be marriages, divorces and unforeseen deaths in the years to come. To make sure your business is always in the right hands, you should:
Failing to properly communicate your plans and manage people’s expectations about what they will receive after your death can lead to increased conflict among those you leave behind. Claims, counter claims and litigation can be costly, time-consuming and hugely disruptive to the ongoing commercial performance of your business.
Care must be taken where any assurances or promises have been made as to the future destination of the farm if the assuree/promisee relies on that assurance/promise to their detriment. Cases of proprietary estoppel have been on the rise in recent years and advice should be taken at an early stage in an effort to avoid litigation within the business.
The benefits of agricultural partnership
An agricultural partnership is a flexible business structure that can adapt over time, enabling you to make the most of your business opportunities. While keeping the business in the family, partnerships can help avoid disputes by clearly setting out who owns what, and what each individual’s business responsibilities are. It can also help to maximise available inheritance tax reliefs, as well as lessen the burden of one individual running the business, helping to strengthen it for the future.
The benefits of diversification
How to maintain or increase the profitability of your business in the future is an important part of succession planning. Diversification can be a great way of ensuring the future success of your business. You could set up a farm shop or a visitors' centre, let out properties on the farmland, or start generating sustainable energy using your natural assets.
By being open-minded and planning early, you can consider all the options available to you and determine which is going to add the most value to your business in the future. It is also important to make sure any diversification is done in a way that allows tax reliefs to be maximised.
Tax implications
Tax law is subject to constant change and scrutiny, making it an important consideration for any succession plan. As it stands, farming businesses can get inheritance tax relief on agricultural property and business property. Achieving the right balance between what qualifies as trading and investment activities, like letting out holiday homes on your property, is important. Advice should be taken to ensure that, overall, the business is structured, as far as possible, to fall on the trading side of the trading/investment line to maximise the chances of the business qualifying for business property relief. This can make a significant difference, as agricultural property relief only covers the agricultural value of your farm, leaving those parts that do not qualify for agricultural property relief subject to Inheritance Tax.
This area of tax law has been the subject of much discussion recently and proposed changes were set out in the Office of Tax Simplification’s second report on reviewing Inheritance Tax, although parliament has yet to pass legislation.
Getting the right advice
Succession planning is complex and involves making some important decisions. As always, it can be beneficial to get an expert in the process on your side. By involving a specialist early on, you can help them get a clear picture of your business and circumstances to ensure you have the right agreements in place to protect your family and business.
For more information on succession planning, please contact Gavin Smith.