Succession planning steps for farming families

25 Jun 2012

Historically the farming industry has not been great at succession planning. By this, I mean, the process by which the business and the ownership of the farm moves from one generation to another is discussed, planned and implemented often whilst managing external forces such as divorce and capital taxation. A failure to plan can have a powerful influence of the development of a business. Studies have shown that farms lacking a successor are less likely to be managed intensively and as a consequence the business may be gradually wound down and de-capitalised. There is nothing more likely to disincentivise the younger farmer then not knowing what his parents or grandparents have in mind and a feeling that he or she has no real input in the future strategic direction of the farming business.

The following are tips on some of the main steps required to successfully transfer assets down to the next generation.

1. Start early

It is important to start thinking about succession planning early. A good plan allows one to anticipate and prepare for future events and will take into account retirement incomes, support for incoming generations, motivation and off farm alternatives for children who do not wish to pursue farming. It can be particularly stressful for the family and has a detrimental effect on the business if a transfer is unplanned through illness or sudden death of the owner. Hastily thought through succession planning under pressure can lead to family disagreements.

2. It’s a continuing process

Succession planning needs to be a regular item on the family agenda. Over time circumstances change and it is important that the planning is flexible and adaptable enough to change to meet the new challenges. New additions to the family, marriages, deaths and other changes all necessitate a review of the plan. So even if you perceive that nothing has changed it is important to ensure that the matter is discussed at regular intervals; ideally yearly and definitely once every three years.

3. Communication and involvement

A smooth transition will be borne out of agreement and discussion by the core family group. Conversely the lack of discussion will cause miscommunications between generations leading to mistrust and ultimately in the worse cases litigation. The start of any planning should be a family meeting (sometimes with the use of an external facilitator) where individual members can express their views on the family’s goals and ambitions, where one is now and what each member wants for the future.

4. Involvement of professionals

Though the decisions are for the family to make it is vital that professionals – solicitors, accountants and land agents – are involved at the appropriate stages. This will ensure that all relevant factors have been taken into account and it is often possible to bring up options and ideas that have not been considered by the family. It also allows for a less emotional and more detached approach to the decision making process.

5. Distinction between farm business and ownership of the farm assets

It is important to always keep in mind that the farm is a business. The ownership of the farm and the running of the farm as a business are two different things and there is no need for one to mirror the other. Sometimes the separation of the two entities will allow greater flexibility to plan for the future and meet the aspirations of those members of the family not directly involved in farming as well as those that are.

The idea of putting in place a plan can be quite daunting. Yet the consequences of putting it off until it is too late can be much worse for the family both emotionally and financially. Many feel that succession planning is all about taxes. It’s not. Though they have an important role to play it is about having a happy family and ensuring that the hard work you have put into the business is not wasted after you have gone.

Options and things to think about

• Consider the best business structure – sole trader, partnership, limited liability partnership or company. Remember you can have different structures for different areas of the farm and different businesses.

• Using Self Invested Personal Pension funds to purchase farming assets and provide income to the senior generation.

• Use a partnership or corporate structure to allow the senior generation to retain an element of control whilst allowing the younger generation a direct input into the business.

• Trusts, despite the drawbacks of the taxation changes in 2006, still have a place and can be used to protect assets from creditors and divorce.

• Consider the use of pre-nuptial and post-nuptial agreements.

• Split the land ownership and occupation. The land can be owned by several members of the family not all needing to have a direct input into the farming business.

• The use of contract farming agreements and farm business tenancies to enable members of the family to get some income but remembering that the rent does not necessarily have to be a full market rent and can be discounted particularly to encourage investment and ultimately a greater return on profits.

• Consider life assurance as a means to provide a lump sum of cash to pay the tax or to buy out non farming family members.

• Wills should be drawn up alongside succession plans and reviewed at regular intervals.

• It is not necessary to transfer the farming assets in one go. Consider gifting in stages or sale to family members.

• Don’t forget about the tests in order to get Agricultural Property Relief and Business Property Relief but don’t let the availability of reliefs dominate the discussions.