One of the most challenging aspects of running a successful farming business is ensuring continuity over the generations. As part of a succession plan it is important to look at the ownership of the farm and a common question we are often asked by our farming clients who are looking to secure the business for future generations is ‘should we transfer the farm during our lifetime or should we leave it to pass via our Wills?’
The answer to this question is far from straightforward and will depend on a number of factors not merely the tax position. Succession planning can be a very difficult process for families to go through and it can be particularly hard to get the balance right between siblings, making provision for those who will not continue to farm whilst protecting the position of those who will. Due to the nature of farming the outcomes can have a significant impact on the lives of those involved and we have found that the earlier the issues are addressed and the more open the discussions are, the easier the process is.
Due to the high value of farming assets tax is vital as getting it wrong could be extremely costly and the tax position will be a major influence in any decision. However it is important not to ‘let the tax tail wag the dog’ and the non tax aspects are also very significant. We have found that one of the major non tax factors is certainty and the knowledge that a gift made during lifetime would ensure the asset is going in the desired direction is often attractive for both the older and the younger generation. It is imperative to take legal advice surrounding this and to make sure that the effects of unplanned and unexpected future events such as marital breakdown and untimely deaths are fully considered. The possibility of ‘legal rights’ claims should also be considered as, under Scots law, a surviving spouse, civil partner and children are entitled to certain legal rights when a person dies with or without a will.
In respect of the tax position a major consideration will be Inheritance Tax (IHT) and often people assume that if they hold farming assets they will be fully protected from IHT by reliefs. Whilst Agricultural Property Relief and Business Property Relief are favourable, it is important to review matters to confirm the position. It is possible that full relief will not be available in a number of circumstances for example if there are agricultural leases in place, if development value exists, if there are assets not in use in the farming business and residential property can often prove problematic. A review of the way a business is structured can often identify IHT savings and we would recommend that all farmers review their current position as a starting point when considering succession.
An advantage of leaving assets via Will is that this can result in significant Capital Gains Tax (CGT) savings on a future sale. For CGT purposes inherited assets are treated as if they were received by the recipient at their value on death whereas assets passed during lifetime, under a gift relief claim, are normally treated as if they are received by the recipient at the historical CGT ‘base cost’ of the transferor. However often farmers do not expect to sell their farms or if they were to sell they would reinvest in further land and claim ‘rollover’ relief to reduce CGT.
When looking at a transfer during lifetime it is important to consider whether any tax would be payable on the transfer and the IHT, CGT and LBTT/SDLT rules should all be borne in mind. With appropriate planning this can often be possible. Many farmers consider using trusts to help the tax position and also to retain an element of control over the assets.
We are finding there are growing concerns that the current favourable IHT position may not last. This view point has been influenced by the fact that the Office of Tax Simplification are currently reviewing IHT and the fact that the Scottish government have called for IHT to be devolved. Given these concerns many are taking the decision to make the transfer when the going is good...
The succession of a farming business is a complex but very important area. Every family and business will be different and will require a tailored succession plan and specific advice. To ensure opportunities are maximised it is imperative that professional advice is taken at an early stage to allow appropriate planning to be undertaken. If you would like to discuss further any of the issues covered in this article, contact Mairi Drummond on (01573) 224391, or Mairi.email@example.com.
Thank you for reading this article. To receive more similar information, guidance on other areas of interest, or to arrange a follow up, please record your details here.