Succession planning in respect of a farming business and the associated assets is no easy task. In most such businesses there is a close link and entanglement between family relationships and business. It is preferable, if possible, to have an open discussion about the future of the business, about the parents’ wishes and vision for the future of the business and where, if appropriate, family members not involved in the business fit in to all of this.
To date farming and rural businesses continue to benefit to a large extent from the availability of Agricultural Property Relief (APR) and Business Property Relief (BPR), exempting the farming and business assets from Inheritance Tax (IHT) upon a transfer upon death. Her Majesty’s Revenue and Customs (HMRC) continue to challenge the availability of APR and BPR in a number of cases every year and it is important to consider the decisions made in Court in respect of availability of APR and BPR when providing advice to clients on proposals for the transfer of business assets whether during their lifetime or upon death by provisions created in their Will.
Careful consideration needs to be given to the inclusion of assets in the business balance sheet. Most farming businesses operate in the form of a partnership. In order for an asset, for e.g. farmland, to benefit fully from BPR, it is sometimes deemed appropriate to include these assets on the partnership balance sheet. As a result, the nature of the asset changes from heritable to moveable and the asset may be subject to a possible Legal Rights claim by family members.
Farmers are often asset rich and cash poor. In light of the continued rise in the value of agricultural land, the farming assets will often carry a huge value compared to other, non-farming assets, held by the farmer. Where only one or two of the children are to benefit from the farming assets upon death, this may cause friction and discontent among siblings. In the course of preparing a Will, careful thought needs to be given to “compensation”, if deemed appropriate, of the other siblings. This can be dealt with by for e.g. bequeathing non-business assets available or by giving consideration to a payment being made by the child inheriting the business or farm assets to his or her siblings. Careful consideration must be given to the terms and conditions attached to such payment to ensure that no unduly onerous burden is placed on the child continuing with the business, as not to affect the financial viability of the business adversely. In considering such “compensation” payments it may also be possible to look at opportunities offered by certain diversification schemes and for e.g. renewable energy projects at the farm. It is not unusual for such schemes or projects to be structured by way of limited companies, separate from the main farming business, with other family members having an involvement or benefit, for e.g. as shareholders in the limited company used to run the renewable energy project.
Consideration needs to be given also to the transfer or assignation of agricultural tenancies. Especially in respect of the fully protected 1991 Act (Agricultural Holdings (Scotland) Act 1991) tenancies consideration needs to be given to the availability of a near relative successor and the likely challenges and objections available to landlords in respect of the transfer to such near relative successor.
Finally, consideration should be given to the use of gifts or legacies to charity. Such gifts continue to attract 100% relief from IHT in addition to providing a lifeline to the funding of charities. If there is no clear succession available for the farm or farming business, consideration may be given to the gifting of land to a charitable land trust. Such trusts provide safeguards in respect of the continued use of the land for agricultural purposes whilst at the same time providing land at affordable rates to new entrants.
Due to the complexity of the succession to a farming business it is important to take advice from both legal and tax professionals and to consider both legal and tax implications in respect of any proposal and to keep the Will under regular review.Petra Grunenberg Partner – Head of Rural Land & Business team
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