Spring clean your legal affairs

Succession planning – what your farming family needs to know

Spring is a time for starting afresh, so it’s a good time to get a plan in place to safeguard the future of your farm and ensure a smooth transition when the time comes to hand over the reins. So what do you need to consider when planning for the succession of your agricultural business?

Lifetime gifts and tax implications

Making lifetime gifts can often be a tax efficient way of passing on your estate to the next generation. A gift made seven years before your death is treated as exempt for Inheritance Tax purposes on your death. Certain lifetime gifts may also qualify for agricultural property relief from Inheritance Tax, subject to conditions.

However, in the case of assets which are likely to increase in value (e.g. land with potential for future development), gifting while the value is low is preferable, regardless of the seven year rule. This is because it is the value of the gift at the time it was made that is considered on your death, not the value that the asset went on to achieve.

Bear in mind that lifetime gifts can also have unintended adverse Inheritance Tax consequences. For example, if a gift of land is made but you hold some of the land to harvest standing crop, this may constitute a gift with reservation of benefit; as such, the value of the gift could be brought back into the value of your estate when you die. Similarly, you should consider Capital Gains Tax (CGT) which is charged on the difference between the base cost and the disposal value of certain assets.

Having a Will in place

You may have specific wishes for certain aspects of your business, or for the distribution and division of land. This is all very well while you remain at the helm, but in the unfortunate event of your death, the only way to ensure that your intentions are carried out is by creating a legally binding Will. It is always advisable to review your Will every few years to ensure that it still reflects your wishes and any recent changes in circumstances. Your Will is also an important tool to help to mitigate Inheritance Tax.

Lasting powers of attorney

A registered lasting power of attorney (LPA) for property and financial affairs enables your attorneys to act on your behalf. This means that, in the event that you lose mental capacity, they will be able to make decisions for you in a number of transactions such as signing documents, negotiating commercial contracts, making investments and transferring land.

Without an LPA, the court will decide who should make decisions about your business. This can be a costly and time consuming process. It can also cause delays, not only in the day to day running of your business but also ongoing transactions such as the negotiations of purchase or sale of development land.

A separate power of attorney may be created dealing specifically with business assets, so that decisions regarding your private assets or accounts and those solely in respect of the business can be dealt with by different people.

Partnership documentation

Having a partnership agreement in place can help reduce the impact on your business if you were to be incapacitated or in the event of your death. An agreement provides peace of mind that, if the worst were to happen, a mechanism is in place to help your successor take over from you. For family partnerships this is usually invaluable.

Partnerships will also need to carefully consider the exit payment provisions within the context of their existing partnership agreements and consider any unintended adverse consequences and make relevant changes.

Family investment companies

Family Investment Companies have become a popular choice for individuals as a useful tool for tax and family wealth planning. A Family Investment Company (FIC) enables you to pass on wealth to future generations in a tax efficient way. It is a corporate structure, controlled by a board of directors, which operates in a similar way to a discretionary trust. Profits are extracted via dividend payments. The formation of family investment companies was driven by a change made by the government in 2006 that made trusts a less attractive option to hold investment assets. The development of FICs were a solution for people who sought a better way to protect their wealth. A good solicitor can advise on whether an FIC is suitable for you.

Professional advice should always be sought when considering succession planning, to take into account all relevant factors including the effect of any gifts or sales on the taxation of your estate during your lifetime and beyond.

If you need help putting in place the plans for the future that you envisage for you and your family, Brachers experienced Agriculture and Rural team can help.

This article was first published in the March 2023 edition of South East Farmer.

This content is correct at time of publication