A recent farm succession survey has highlighted that around 40% of farmers have not thought about succession planning for their business.
WBW Partner Malcolm Emery explores succession planning to eliminate the risk that the business may not survive and prosper for future generations.
One possible option is for one or more family members to join the family business during the owner’s lifetime. The family member’s admission may involve the owner gifting over some of their business so the potential loss of control could be an issue for them. A share in a business can usually be transferred over in a tax efficient way so that no immediate tax charges arise.
If the owner is worried about giving up a share in the business then a better solution would be to place this in trust for the benefit of his or her family. This would ensure the owner retained control of the business since they could also be named as one of the trustees. Provided the Trust was drafted correctly the trustees could then decide how the share of the business held in trust was used for the benefit of the owner’s family.
Planning by a Will
If lifetime planning is not a possibility a well structured Will is essential particularly if provision has to be made for the owner’s spouse.
If structured correctly the farm business should be able to qualify for a mixture of 100% APR/Business Property Relief (BPR) which effectively exempts its value from the impact of inheritance tax. As such it is important that these reliefs are maximised on the first spouse’s death.
If the farm business passes from one spouse to the other on the first spouse’s death then these reliefs are wasted. This is because transfers between spouses qualify for the spouse exemption. In the surviving spouse’s hands the farm now forms part of their estate and will be taxable on their death unless APR/BPR is available. At this stage, APR/BPR may not be available because:
• The farm has been sold and replaced by property (investments) which do not qualify for the relief;
• The farm no longer meets the qualifying rules;
• The reliefs have been abolished by the government.
A possible solution would be for the owner to leave the farm on what is known as a Discretionary Trust under their Will. Under this type of Trust the trustees have full discretion over which beneficiaries should benefit from the trust fund. The beneficiaries would usually include the surviving spouse, children and issue.
In addition to the Will a letter of wishes should also be put in place which provides guidance to the trustees on how the owner envisages the trustees using the farm (or any assets that replace it) for the benefit of his or her family. The letter would usually stipulate that the surviving spouse should be treated as the primary beneficiary and benefit from the Trust during their lifetime. This would usually be in the form of the trustees distributing profits from the farm to them. Of course, the trustees appointed under the Will could decide to sell the farm and re-invest the proceeds in another form of investment (e.g. stocks and shares). Again, the trustees could pay over any income arising on these investments to the surviving spouse and also transfer capital to them. In this type of scenario it would be more tax efficient for the trustees to simply loan capital to the surviving spouse rather than distribute capital to them.
Following the surviving spouse’s death the Trust could be retained for the benefit of the owner’s children (or wider family members) or be collapsed and the assets within it appointed between the beneficiaries. Flexibility is the key here to ensure that the Trustees can react to changes in the beneficiaries’ family’s personal circumstances and also any legislation introduced by the government.
For more articles from our Farms and Estates team also see our ‘Need to Know’ Newsletter