The importance of succession planning for your family farm
The COVID-19 pandemic and the uncertainty and devastation it has caused – for families, businesses and the whole economy – has resulted in a significant rise in the numbers of people looking to make plans for their future.
The unprecedented circumstances of the past few weeks have wreaked havoc across the country, with the numbers of COVID-19 fatalities tragically rising by the day and growing levels of businesses battling for survival. These have been truly traumatic times indeed.
However, as we now emerge from lockdown and look at returning to some form of ‘normality’ (whatever that will look like in the post-pandemic period) the focus for many has been shifted from focusing on the immediate future to now also include planning for the longer-term.
Succession planning for the future of the family farm or business has always been of the utmost importance, but many people are now taking action and putting provision in place for such time as they are no longer here. Certainly by making plans now, there are significant tax efficiencies that can be made, particularly with regard to Inheritance Tax (IHT).
A good place to start is by making a will. By doing so, you can help avoid potential disputes that may arise through the rules of intestacy (the rules that apply to your estate if you die without making a will). Under these rules, if you are survived by, for example, your spouse and children, your spouse will be entitled to receive the first £250,000, your personal possessions and half of whatever is left. Depending on the value of your estate, this could leave the spouse vulnerable if they do not inherit the whole estate and attract an IHT liability as the assets passing to the children will not be covered under the spousal exemption rules.
Furthermore, if some of the children are involved in the family farming business, and others are not, it could lead to disputes within the family, especially if some of them need to raise money to buy out their siblings who do not an interest in the future of the farm.
Another important factor in making a will is that you can have the opportunity to review the structure of the business and legal documents behind how the farm is operating. For example, there may be partnership deeds or shareholder agreements in place, or tenancies and grazing licences, which you can examine and revisit as necessary, particularly those which have been in place for some time.
By planning for your future, you can also review the IHT position of the farm and whether your interest would qualify for Agricultural Property Relief (APR). APR is a generous relief available if certain conditions are met. APR is a relief available on the agricultural value of agricultural property. If the conditions are met, APR can minimise the amount of IHT payable on death.
Briefly, APR is available on transfers of land occupied for the purposes of agriculture, together with appropriate buildings and farmhouses used in conjunction with that land. The property in question must have been either occupied by the owner for the purposes of agriculture for two years prior to the transfer, or owned by you for seven years and occupied by someone else for the purposes of agriculture throughout that period
It is often assumed that your farmhouse will automatically qualify for APR if the land is being farmed, but if you are no longer able to farm through ill health or retirement, this can present problems. Similarly, if you are living in the house, but you have let all of your land out to tenants, this could impact on the level of IHT payable, although through careful financial planning this can be mitigated as much as possible.
Any grazing licence arrangement that you have should also be considered to ensure the conditions for occupation are met. Although the land is grazed by someone else, you will want to ensure you are still deemed to be the occupier for the land to qualify for APR. Retaining responsibility for the maintenance and repair of the land is also essential to prove the conditions for occupation are met.
These past few months have been difficult for us all, but the renewed focus it has placed on the importance of future planning has been one positive to emerge. By putting together a succession plan for you and your family, which is then revisited and updated as necessary, this can ensure your farm passes as you wish after your death with your family being able to benefit from the maximum tax efficiencies.
Sintons has advised families on succession planning for over 120 years, and has looked after the futures of several generations of farming families across the North. Please speak to us for any support you may need in putting these vital plans in place.