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Succession planning for your farming business
- AuthorBeth Worthy
Succession planning is all about making plans for the future. It enables you to protect your assets, safeguard your farming business, provide for your family and ensure continuity and the smooth transition of the farming business when you step down from running that business. Poor succession planning, an ageing workforce and less new entrants to the farming sector are all causing issues.
There are also a number of specific issues that arise when considering succession planning for the farming business.
- Farming families
Often farms have been owned by the same family over more than one generation. This can mean that farms are operated with parents and siblings and their children including their partners and spouses. This can result in difficult family issues.
- Sole traders
If the farmer had run the farm on their own as a sole trader, then how do they pass the farm on to the next generation? Is a partnership or a limited company the most appropriate way of doing this?
When considering your options, you should always get good advice from all of your professional advisers to ensure that any Tax or other consequences arising from such changes are considered and mitigated. Proper written agreements are also essential.
A properly drawn up Partnership Agreement is very important as it sets out all the terms that you and the next generation must work to when running the business together and for when you step back from the business.
- Limited Company
If the business is operated via a limited company, you should consider a properly drawn up Shareholders Agreement which sets out the terms of passing on your shareholding to the next generation and how you and your co shareholders operate the business and how you leave whether this be on retirement or on death.
Notice is usually required to leave the business if you want to retire so timing that properly is very important as it could take you say 2 years to retire.
If you have a controlling interest in the company and the next generation as your co shareholders you should consider how you leave your shares to your family as this may result in one shareholder acquiring a controlling interest of their own.Could this cause conflict between your beneficiaries?
- Capability of running the business
Who from your preferred beneficiaries is prepared to run the business and who has the skills to do so? The next generation may have differing priorities to those of the current farmer. How do you choose from your intended beneficiaries if there is more than one?What if those beneficiaries have difficult relationships?
You need a plan for mentoring or training the future generations, including how you will step back from running it yourself.
What if the farmer loses capacity and they have complete control over farm bank accounts and other assets?
It is extremely important that you consider making a Lasting Power of Attorney since, if you lose capacity and cannot make decisions yourself, and the alternative to an LPA is complicated, slow and expensive. If you already have an LPA (or the old style Enduring Power of Attorney), you should review it to check that the persons you have appointed as your attorneys and the powers you have given them are appropriate to the current circumstances. Any EPA or LPA can be changed at any time, similar to a Will. In relation to the day to day running of your business, the lack of authority to act on your behalf could be catastrophic if you are a central figure in the financial side of running your farming business.
By using Trusts you can separate the control of the farming business from the economic value of the business. Trustees should act impartially, and if they are not beneficiaries of the Trust they will have no personal financial motive for making certain key decisions. A Trust could also provide centralised decision making and long term asset protection and control. Trusts can last up to 125 years, and the original owner, as Trustee, can control the business without remaining an actual owner for a considerable period of time.
If you die without a Will then both your farming business interest and the assets you own that are used by the farming business may not pass to the persons who you would want to receive them. This may even jeopardise the continued running and success of the business.
The answer to all of these potential issues for the busy farmer is to plan ahead, involve your professional advisers and the next generation and get your paperwork in order whilst you can.
The NFU in conjunction with its Legal Panel Firms (Crombie Wilkinson Solicitors are one of two legal panel firms for the NFU North East region) is pleased to offer NFU Farmer & Grower members an entirely free initial Legal Health Check in relation to their farming or growing businesses. This service aims to help identify and highlight any potential issues, legal gaps or other matters members might want to address to help secure their farming, growing or diversification businesses.
The Legal Health Check can also significantly help underpin business resilience. During the current unprecedented changing times with the future implementation of the Agricultural Transition Plan, Environmental Land Management Scheme, Lump Sum Payments to name a few, this Legal Health Check could assist in many ways - including, but not limited to, the following areas:
- Succession planning
- Property matters (includes ownership, tenancies, land registration)
- Estate planning (includes Wills, Lasting Powers of Attorney, Trust Deeds etc.)
- Business structures
- Share farming
- Contract farming
- Rights of Way (including Section 31(6) applications)
Contact a member of our Private Client team for legal advice specific to your farming family and farming business. If you are an NFU member, we can carry out an initial free legal health check for you and then you may be able to benefit from the NFU Legal Assistance Scheme offer until 31 October 2022 where the NFU can provide a financial contribution of up to £250 towards the costs*.