Why it pays to plan for retirement for farmers

In May the government launched a consultation on exit payments to farmers, to encourage older generations to retire and enable younger farmers to enter the industry. The proposal, that farmers could be paid a lump sum up to £100,000 to retire, forms part of the wider overhaul of grants and schemes set out in the Agricultural Transition Plan.

Regardless of the reasons for retirement, having a plan in place is the most effective way to safeguard the future of your farm and ensure a smooth transition when the time comes to hand over the reins. The proposed payments won’t be suitable for everyone and many in the sector will continue with the traditional route of handing down their farming business. So what do you need to consider when planning for the succession of your agricultural business?

Lifetime gifts and tax implications

Making lifetime gifts can often be a tax efficient way of passing on your estate to the next generation. A gift made seven years before your death is treated as exempt for Inheritance Tax purposes on your death. Certain lifetime gifts may also qualify for agricultural property relief from Inheritance Tax, subject to conditions.

However, in the case of assets which are likely to increase in value (e.g. land with potential for future development) gifting whilst the value is low is preferable, regardless of the seven year rule. This is because it is the value of the gift at the time it was made that is considered on your death, not the value that the asset went on to achieve.

Bear in mind that lifetime gifts can also have unintended adverse Inheritance Tax consequences. For example, if a gift of land is made but you hold some of the land to harvest standing crop, this may constitute a gift with reservation of benefit and the value of the gift could be brought back into the value of your estate when you die. Similarly, you should consider Capital Gains Tax (CGT) which is charged on the difference between the base cost and the disposal value of certain assets.

Having a Will in place

You may have specific wishes for certain aspects of your business, or for the distribution and division of land. This is all very well whilst you remain at the helm, but in the unfortunate event of your death, the only way to ensure that your intentions are carried out is by creating a legally binding Will. It is always advisable to review your Will every few years to ensure that it still reflects your wishes and any recent changes in circumstances. Your Will is also an important tool to help to mitigate Inheritance Tax.

Lasting powers of attorney

A registered lasting power of attorney (LPA) for property and financial affairs enables your attorneys to act on your behalf. This means that, in the event that you lose mental capacity, they will be able to make decisions for you in a number of transactions such as signing documents, negotiating commercial contracts, making investments and transferring land.

Without an LPA, the court will decide who should make decisions about your business. This can be a costly and time consuming process. It can also cause delays, not only in the day to day running of your business but also ongoing transactions such as the negotiations of purchase or sale of development land.

A separate power of attorney may be created dealing specifically with business assets, so that decisions regarding your private assets or accounts and those solely in respect of the business can be dealt with by different people.

Partnership documentation

Having a partnership agreement in place can help reduce the impact on your business if you were to be incapacitated or in the event of your death. An agreement provides peace of mind that, if the worst were to happen, a mechanism is in place to help your successor take over from you. For family partnerships this is usually invaluable.

Partnerships will also need to carefully consider the exit payment provisions within the context of their existing partnership agreements and consider any unintended adverse consequences and make relevant changes.

The exit payment consultation closes on 11 August 2021. Professional advice should always be sought when considering succession planning, to take into account all relevant factors including the effect of any gifts or sales on the taxation of your estate during your lifetime and beyond.

This article was first published in the July 2021 edition of South East Farmer.

This content is correct at time of publication