As accountants we often tend to see succession as being primarily a fiscal issue and will normally approach the problem from that perspective. Certainly there are currently very powerful reasons why that approach is now a valid one. In historical terms the capital tax environment has rarely been more benign, and whilst it appears that the immediate threat on capital tax reform has passed, at least until the autumn, the imperative for the treasury to raise money will not go away. Indeed as interest rates rise, the need for extra tax will become more pressing. What we can safely say, is that the likelihood of the capital tax regime improving for the agricultural business in the foreseeable future seems remote.
For farming businesses, tax is a threat, and it should not be underestimated, but it probably isn’t the main driver. Family businesses will naturally reach a tipping point one day, when land ownership, management control and entitlement to profits will pass from one generation to the next. These three elements will not automatically pass simultaneously, but sooner or later pressure will naturally build up from one generation or the other for change to be implemented. External factors can also speed up or slow down the process. Tax may be one of these, but currently the prospect of agricultural subsidy reform is probably a far greater factor. The change in the direction of agricultural support for the first time in perhaps two generations, coupled with the removal of a significant part of farm profits, and the drive towards a more environmentally friendly approach will for many be the trigger for a fundamental change in the organisation of the business, part of which may be a succession.
As key agricultural advisers, we will often be called on to facilitate the process, and , at risk of repetition, we need to remember that tax is only one of the issues – the process is far more about teasing out the motivation of the generations, setting realistic financial and practical parameters and removing deal breakers. A typical process might be handled as follows:
- The fact find. Do we know all the properties involved and who owns them? (Not always what the family thinks). Have we up to date accounts and some idea of everyone’s income requirements?
- What are we trying to achieve overall? Are we aiming for a final destination or just a step on the way?
- What is each party looking to achieve? Are these aspirations consistent or even feasible?
- Are there deal breakers and can they be side-lined?
- What tools do we need? Can we simply accommodate everything within the existing partnership/company or do we need to consider bringing in another structure to help the process/remove a deal breaker?
- Once 1-5 have been considered can we set out a broad strategy?
- Will our strategy work with all the known problems?
- What about unknown factors? Will it be sufficiently robust to cope with untimely deaths, divorces, threats and opportunities?
- Are there any tax problems? The availability of holdover, rollover, PETs, lifetime gifts and business asset disposal relief should address most issues, but it is important to test each element of the strategy. Given that the plan is likely to endure for a generation, simplicity in tax terms has much to recommend it.
- Does the plan still satisfy 2-4 above? Then it may be capable of implementation.
One of the key issues for advisers is to recognise that succession is far more about personal factors than financial or fiscal ones. The factors which drive donors towards a “recognition point” are many and varied. Each case is different, but they may include:
- The wish to take a less active role on the part of the donor. The generation now retiring may have seen some good years in farming, and now feel that the time is right to pass everything over and even move right away from the holding (though it is more usual to remain close at hand to help the transition and “lend a hand” at peak times).
- The psychological need to straighten one’s affairs in old age. This may just be part of the need for tidiness or it may be recognition that the family do not always work well together and by grasping the nettle in lifetime, a strong succession plan can be the retiree’s last contribution towards passing the farm down the family. There is often a sense of obligation to the retiree’s own parents, grandparents and remoter ancestors, and failing to ensure a timely and clean handover can be felt to be letting down all those family members who have passed before. It is noticeable that the best successions tend to come from those who have themselves taken on the farm with a clean handover (although it may also be that they have holdings which lend themselves better to the transaction).
- There may be aspects to the succession which are very much better dealt with in lifetime. Typically this would include the succession tenancy, where perhaps father has links (possibly family ones) with the landlords which are better than those enjoyed by the next generation. It therefore makes sense to secure the succession as a retirement tenancy rather than on death (although conversely sometimes father’s relationship with his landlord is so bad that the landlord is just be grateful to have a new tenant who he can actually talk to).
- In many cases there will be pressures from the next generation. These may be financial, in that the new generation has a growing family at a time when the parents’ financial needs are reducing, or they may just be managerial, where the new generation are frustrated by the conservatism of their parents. In some cases (and normally only in the privacy of the accountant’s office) a father will admit that the son is a better farmer than he is – which can often be the case, given the higher level of education and training which the new generation will have enjoyed.
Specific problem areas include:
- Primogeniture has a lot to recommend it, and is one of the reasons why agriculture is much stronger in the UK than it is in areas where partible inheritance is the norm. It normally makes sense to keep the holding intact and pass it to a single donee. How does one then make provision for those children who will not inherit the farm? It is difficult to approach this question in a way which is not today seen as sexist, elitist or both.
- No one ever knows when they will die. If they did, one of the key problems in succession planning would disappear. There will always be a balancing act between giving it away too early and starving in old age, or clinging on to the end and frustrating the donees, even to the point where they give up waiting and find a career elsewhere. Unfortunately the tax system, and particularly the interaction of IHT and CGT tends to favour the latter approach and in some circumstances the best TAX advice we have been able to give is to “carry on farming until you drop, preferably whilst still driving a tractor”. This doesn’t normally go down well with the next generation, will not always make for a good professional relationship with them in future, and could be positively dangerous in the new post Brexit world of agricultural change.
- Are the next generation up to it? There is a phrase often trotted out by fathers along the lines of “he/she hasn’t got enough mud on his/her boots yet” which is normally the excuse for holding on a bit longer. There will be similar views as to the suitability and steadfastness of the successor’s spouse. In-laws often fail to get on at the best of times, and when they find themselves living nearby (or sometimes even in the same house) relationships can be strained. The spectre of divorce settlements is a huge fear and no one wishes to see the work of generations being lost to a departing spouse. This can be an excellent excuse for putting off the decision, even when the children have been happily married for decades and their own children are now adult.
Some farms lend themselves better to succession planning than others. The ideal cases are probably either large ones or small. In the smaller farms it is painfully obvious that there can only be one donee so siblings will generally have created jobs of their own, aware that only one of them will receive an inheritance, and anything left over for the others will be an unexpected bonus. The problem here is more likely to revolve around how to extract two incomes from the farm in the period of transition, and these are often the cases where IHT is not really an issue and father continues to take a large part of the profits at least until he starts receiving State Retirement Pension.
At he other end of the scale the “estate” farm will also have precedents for primogenitural handover but this can be varied and kept flexible by the use of family trusts – the eldest son will not always be the best farmer for the future. Here the siblings will also have established their own careers or marriages (often into other farming families). Sometimes they will be running a business outside farming from part of the estate. Ultimately there may be sufficient wealth to help them without crippling the core estate. There are often multiple houses on the estate, so these can come into the equation (even if only on lifetime interest). If necessary, some provision can be made by way of loans or tenancies which will give income or assets which can relatively comfortably be paid out of the estate by the successor to provide substantial, if not equal inheritances. Indeed in these cases, it is sometimes perceived by the main donee that he has drawn the short straw: as a farmer he will make a pitiful return on his capital and will spend much of his working life saddled by debt, whereas his siblings will actually see a cash inheritance – on the other hand he does get to live in the big house…
In between these extremes the balancing act becomes more difficult, and this is where the knowledge and experience of the adviser will become key. At the end of the day there will always have to be a succession – the trick is to make it as simple and painless as possible.*The views expressed are the author’s and not ICAEW’s.