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Succession planning for farms and estates – when is it too early to start?

Rural business owners take care to minimise risks and maximise opportunities for their business every day.

It’s essential the same time and energy is given to considering the impact of personal estate planning. Careful planning ensures the success of the family business in the event of retirement, death or loss of mental capacity of any of the owners.

There are many challenges that come with protecting a rural family business on succession, especially as business life and personal life often overlap significantly.

A well-considered succession plan carefully balances the needs of all family members who work within the business, while helping the owner find ways of treating other non-working family members with fairness.

Add into the mix a complex and unforgiving inheritance tax regime, and it becomes very important for an estates and rural business owner to take specialist advice as they plan for the successful future of their estate.

The current landscape and looking towards the future

Economic uncertainty, environmental pressures, conflict in Ukraine and the cost-of-living crisis has presented challenges for many businesses, both rural and urban. It’s important that these economic changes provoke thought and discussion around business and succession plans.

Rural businesses and landowners may need to consider further diversification of their business to increase turnover and profit.

They may wish to enter into environmental land management schemes to benefit from government payments.

Such changes to the business model are becoming increasingly common and are likely to impact on the inheritance tax position for an estate. Any diversification will result in the need to adapt any personal succession plans to align with a dynamic business plan.

The core building blocks of succession planning

At the heart of succession planning are the structures around the operation of the family’s rural business enterprises.

It’s these structures, and the documents that help underpin these, which safeguard the family’s long-term investment in the estate for future generations.

In respect of structures, these could be, for example, family investment companies, limited companies, partnerships, limited liability partnerships and leases or tenancies.

The legal documents can include pre- and post-nuptial agreements (to protect against the upset and cost of disagreement concerning finances on the breakdown of a marriage) Wills, Will trusts, lifetime trusts and carefully crafted letters of wishes.

On the business side, they can include partnership agreements, shareholders’ agreements, bespoke articles of association, family charters, sale and purchase agreements and share purchase agreements (that might address the transfer of assets allowing estate owners to retire).

There are many different options and business owners should consider in detail which structures are right for them and the future of their estate.

Open conversations and managing conflict

The starting point is often dialogue within the family.

If plans, wishes and aspirations are not aired and clarified, there is a real risk of misunderstandings and confusion between family members.

Undocumented promises to a family member can give rise to hotly contested and expensive litigation, as there is little in the way of documentary evidence to support such a claim.

Creating expectations and formalising plans can avoid disappointing family members and minimise the risk of potentially irreparable damage to relationships across multiple generations. It also avoids costly legal challenges if there is a dispute.

By having open conversations and the right structures and documents in place, rural businesses and the families that run them will have clarity and certainty for the future. In turn, this serves to promote healthy working relationships within the family, instead of breaking them. The moral: plan now for the future you want for your estate.

Understanding the business owner, the family and the estate

The best planning starts with a comprehensive understanding of the current financial landscape for any family and business. This includes an analysis of the asset, debt, and current and forecast turnover positions of the business.

A clear understanding of the medium and long-term needs, aspirations and ambitions of the individual family members is also needed.

This often includes having accurate valuations for the estate, including any land and buildings, both in terms of their agricultural value and possible enterprise value (if diversification and/or development are opportunities).

As advisors, we need to have a clear understanding of the concerns and priorities of the individual to include the level of their desire to minimise tax.

We can help guide estate owners and rural business owners to consider what fairness means to them and how to divide business and personal assets between multiple beneficiaries and generations. Some of whom may not be directly involved in the business activities.

The future of an estate hinges on effective succession planning. Once a plan is in place, it then needs to be reviewed regularly particularly at important life events such as births, deaths, marriages, divorces and significant business opportunities which might arise along the way.

A dynamic plan that adapts as families grow, as business plans evolve, and as the economic and legal landscape affecting estates changes, is likely to be the most successful in leaving a legacy that will continue to flourish.                                                                                                                 

Effective and timely succession planning can contribute to the future success of the business.

Rural businesses and landed estates are often asset rich, but cashflow must be managed carefully.  Unexpected tax charges can put a strain on the business, which then puts pressure on the family as often the business and family are intrinsically linked.

It is never too early to review your plans. As tax laws may change, it's important to consider the advantages of taking action now, in an environment that is understood and utilising tax reliefs currently available.

Given the uncertainty surrounding the tax implications of diversification, coupled with the increasing financial necessity for diversification, securing reliefs while the tax status of the land and assets is clear should also be considered.

There are ways in which value can be passed on to subsequent generations, without control passing.  Often, once conversations are started, opportunities present themselves.