The question of when to pass down the family farm to the next generation is often a difficult one to answer. With many aspects to consider, it’s easy to see why it’s a topic often avoided by farming families. However, 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.
A common query from our clients is whether a gift should be made during lifetime or otherwise left until death, and timing is an important factor. Handing over significant assets too soon can cause difficulties for a number of reasons. For example, is the recipient truly committed to pursuing the family business/ trade? What are the tax consequences? Might the gift inadvertently trigger a charge to Capital Gains Tax (CGT) or leave an unpalatable exposure to Inheritance Tax (IHT)?
Nevertheless, there might still be good reason for gifting some or all of the family farm or farm business sooner rather than later. A legal advisor can help you assess the financial implications of the timing of your gifting, as well as advise on the discussions you need to have with your family around the broader succession planning process.
More broadly, we are all aware of the uncertainty surrounding the future of farming. Could this uncertainty be an opportunity to accelerate succession plans? Here are a few things to consider:
Land value: Timing the gift when land and property prices are lower can be tax efficient. Gifting at this time could mean that the value of the gift that lingers in your estate for the next seven years is lower than the value that it might be at any point during that period. While the current property market is still buoyant, the impact of the war in Ukraine has not yet been felt. It is useful to be alert to this opportunity if the property market does fall.
The impact of political uncertainty on agricultural reliefs: It would be sensible to consider taking advantage of IHT reliefs such as Agricultural Relief (AR) and Business Relief (BR) while they are still as favourable as they are. The Office of Tax Simplification (OTS) has made recommendations that may make IHT reliefs, particularly BR, harder to achieve. Those recommendations have not been implemented “for now” so it may be prudent to take advantage of the current window.
The Basic Payment Scheme: With the Agriculture Act 2020 making changes to this scheme, the agricultural sector will need to diversify income streams and innovate farming practices to maximise income. Innovation is likely to be critical to the success of post-Brexit farming and therefore needs to be encouraged. What better way to do so than to incentivise the next generation by giving them ownership and control of decision making? Gifting to the next generation may well incentivise innovation to help long standing family businesses continue for generations to come.
So there are many reasons why now might well be a good time to consider passing on the family farm to the next generation. Any proposal, though, needs to be carefully considered to ensure that problems do not arise.
Like any gift, a balance needs to be struck between giving and retaining enough for the future so as not to leave yourself short. It will be important to avoid inadvertently triggering a charge to tax if the gift is not given in the appropriate way. Likewise, what will the effect of gifting be on the family dynamic if one child is treated more favourably than another?
Gifting might or might not be the right thing to do but is certainly something which should, in the present climate, be considered, given so much uncertainty about the future. It is always recommended that professional advice is taken when considering any sort of gift to highlight the benefits and challenges that may arise.