Succession planning for farming clients: not for the faint-hearted

farmingEstate and succession planning for farming families has become a complex endeavour. Here’s what the modern estate planner must bear in mind.

The face of British agriculture has changed tremendously over the last 20 years. Falling farm incomes, increased compliance, a more global market place, and the need to diversify, have changed the nature of farming businesses.

Recent surveys have indicated that succession planning, or lack of it, is a significant issue and a major worry for farming families and rural business owners.

Allied to the changes in business make ups, agricultural land values have increased exponentially faster than increases in inheritance tax thresholds.This means that the financial consequences of failing to plan can be very expensive.

Alongside the financial costs, the courts have consistently turned out case law materially affecting succession planning for farmers. High profile cases, such as 'Ilott' and 'Cowshed Cinderella', give an extra headache to estate planners. HM Revenue & Customs has also taken up the baton and continue to issue a steady stream of case law and guidance, further defining and determining the application of tax reliefs. 

With increasing land values has come the greater impact of divorce on farming families. The threat of a divorcing spouse receiving a considerable chunk of capital can often prove to be catastrophic for a family farming business. 

In the majority of cases, the primary objective is to preserve the family farm for the next generation, and to ensure its ability to continue to trade. 

All of these factors present challenges to estate planners. Far from being simply a matter of making a will, succession planning for farming families requires the combination of a number of professional disciplines. A balance needs to be struck between tax planning while retaining asset protection from the threats of divorce, bankruptcy and long-term care fees.

The way we were

For those involved in advising farmers on estate planning, it always used to seem a bit easier. There has always been the classic farming problem of how to provide for children when one is involved in the farming business and other children have flown the nest.

However, a solution could usually be found. Typically, farmland and farm business assets could be left to the child in the business, with private assets left to the other children. However, with falling incomes and increased land values, the ratio of farm assets to private asset values has increased significantly. It is not uncommon to meet farming families where there are few private assets outside the family farm and its working capital.

Putting aside this classic farming problem, in general terms, tax planning for farmers used to be relatively straightforward. The land qualified for inheritance tax agricultural property relief (APR) and the business qualified for business property relief (BPR), both at 100 per cent. Factor in the capital gains tax free uplift on death, and the tax planning was simple – keep the farm and business until death, leave it to the children and rely on the availability of inheritance tax reliefs.

On the assumption that farmers never retired and simply exited once they reached their three score years and ten, the main tax problems arose when the value of any private assets exceeded the inheritance tax threshold. However, taxation on the farming assets was not usually a problem.

New challenges

With HMRC being more rigorous in the application and availability of APR and BPR, and a much higher degree of farm diversification, estate planning solutions have dramatically changed, with more focus on making the best use of tax reliefs and passing assets down to the next generation at a far earlier stage. 

With life expectancies increasing, older farmers now often look for the opportunity to take a well- earned retirement.

If not, if a farming couple live into old age retaining the farm assets, their children are often involved in the business without owning any significant assets. It is not unusual to advise farming families where the next generation are well into their 50s with a hope of inheriting assets from their parents, but with very little in the way of assets of their own.  

Now, HMRC also takes a closer look at who is involved in the family business and is more ready to question if they really are still working as farmers.

The net result of this has been to turn succession planning solutions almost full circle, with the emphasis now on putting in place lifetime structures to help succession planning, rather than simply rely on inheriting through the will. Giving the next generation a stake in the business at an early age, while factoring in protection against divorce, bankruptcy, tax and long-term health issues, is a significant factor.

Development land

With the general acceptance of the need to build more houses and the economic climate improving (subject to any effects of Brexit), strategic land development has been on the increase. The conversion of inheritance tax-efficient farmland to tax-inefficient cash gives further opportunity for tax and estate planning. Entrepreneurs’ relief from capital gains tax gives further tax mitigation options. Given the values, tax consequences can be quite severe. 

Development land also brings into consideration the use of overages and clawbacks not only for previous owners, but also within families. The existence of development land within a farming set up creates a whole new set of considerations for succession planning, to make sure that any children not involved in the business can possibly share in any development uplift.

What’s in a name?

Estate and succession planning has also thrown up a number of new business structures. We now have contract farming and share farming agreements, tenancies, partnerships, companies, LLPs, limited partnerships and profit á prendre agreements. Estate planners have their work cut out, keeping up with the various different business structures and how they apply.

The modern estate planner needs to be able to deal with will and tax planning, but also be able to advise on business structures, property ownership and asset protection, while having an eye on avoiding future litigation.  

It’s not all bad

While I may have painted a bleak picture for the modern estate planner, before you reach for your tissues, advising farming families can be a very fulfilling exercise. A well-constructed estate plan can save a lot of family angst and provide peace of mind. The intellectual challenges of advising farming clients gives professional pride in a job well done and (hopefully) a happy and satisfied client.

The fact that there is a plan in place can often lift the worry from a farming family’s shoulders.

About the author

John Rouse is a partner in the wills and estate planning team at Wright Hassall LLP