Succession planning for farming families
How do you match up the competing needs and aspirations of different members of the family when there is only a single land holding?
In this context, ‘the family’ not only includes the claims of different siblings but also the competing needs of perhaps two or three generations.
The position is not just for one generation. Whilst it may be possible for arrangements to be made whereby brothers and sisters work together in the family farming partnership or company, the structure that might work for one generation is much less likely to do so when cousins, second cousins, uncles, aunts, nephews and nieces are all deriving income from the same holding. This is especially so when some of them work in the business and others merely draw a share as a sleeping partner or landlord.
So what are the solutions?
1. Sell the farm
The first and most obvious solution is for the family farm to be sold at the end of the proprietor’s working life (or on death, to “bank” the tax reliefs) and the proceeds divided amongst the family. This may be appropriate (but sometimes not very tax effective) where nobody wishes to continue the farming business. However, in many cases there are both practical and emotional reasons why this will not work.
2. Divide the farm unequally
The second, and probably most common, solution is for the farm to be divided unequally: one of the children will inherit a disproportionate share and continue the business with whatever provision can be made for the others by way of recompense. This can create massive friction and, in cases, can end up in litigation with contested wills and family feuds going down the generations. If this approach is adopted, it is absolutely essential that the family are fully aware of it from the outset. It may be unfair, but at least it will not be a surprise when the will is read.
Alternatives to this option will generally look to limit the unfairness for a generation. This may, for example, involve giving one party the right to buy back land that has been left to another, redeemable shares within companies or the creation of longer term tenancies which will enable “the farm” to continue whilst paying an affordable rent to non-farming members of the family.
3. Create secondary sources of income
Finally, there is a possibility of creating secondary sources of income for those members of the family who do not carry on farming. In the case of parents/children splits, it has in the past been possible for one generation to make sufficient pension provision to enable them to live comfortably in retirement whilst the farm is passed on to the next generation. This is perhaps less likely in today’s climate, but alternatives can involve splitting out diversified parts of the business to non-farming members so that, for example, one member of the family will inherit cottages and off-lying land whilst the other retains the core farm.
This latter method of planning is likely to see considerable development in the near future. In part this is due to the availability of new sources of income such as green energy projects, which are not core to the farm business and which can be used to provide an income to a parent in retirement or to a non-farming sibling. Changes in the pensions regime that have come about in recent years may also give scope for further development here, since it might be possible for draw-down pensions to be set up by one generation and then passed down to the non-farming members of the second generation.
Clearly, no two families are the same and no two solutions will be identical. However, the problem will not go away and if it is not addressed at an early stage, it can cause huge distress, bitterness and, in some cases, expense. We have helped in many such arrangements over the years and whilst no two situations are identical, we have years of experience available to our clients in arriving at the best outcomes.
For more information, please contact Liz Cliffe.
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