Posted on 20th January 2013

Lack of Succession Planning can Jeopardise Farm Businesses

By Anne Elliott, Partner and agricultural law specialist at Latimer Hinks Solicitors,

Historically, farmers have not been particularly motivated so far as succession planning is concerned, a fact that can have potentially disastrous consequences. In a worst case scenario, with death or illness, a farm can be lost to the next generation, or the next generation is burdened with financial borrowing and/or constraints.

According to a recent Barclays Bank survey of 400 arable and dairy farmers, more than four in 10 UK farmers do not have a formal succession plan in place. A quarter of those surveyed admit that it was because they had simply not thought about it. What is even more concerning is that 16% believe that they do not need a plan. I want, in this short article, to emphasise the need for planned succession, and why, without it, the future can be very precarious indeed.

Ideally an integral part of the process should be discussing with your family what you intend. You and the next generation almost certainly want some certainty. Try and communicate to avoid any misunderstandings in order to avert a potentially irreconcilable family rift.

Transferring a family farm and business requires planning. This process is best undertaken as a managed and evolving process. You can manage the entry and exit of different generations. Connections with the past, present and future are slowly formed but can be quickly broken, so plan in a timely way for a smooth transfer.

The transfer process itself potentially involves two key areas:

  1. Succession: the transferof managerial control; and
  2. Inheritance: the transfer of control of the assets and ownership.

You will already be aware of these facts if you are a second-generation farmer. You will have been through the process: the initial trial period, the assumption of increased responsibility that comes with some management control, with perhaps the total transfer of management and control followed by the ultimate exit (by way of either retirement or death) of the older generation.

For the four in 10 arable and dairy farmers (a figure which can probably be extrapolated to relate to four in 10 of all farmers) who do not have a succession plan in place, here are some pointers:

1.Bite the bullet The importance of starting your succession planning at an early stage cannot be overemphasised. Think what would happen in the worst case scenario e.g. death or serious injury. Any plan should take into account amongst other things the financial and emotional needs of the protagonists (i.e. those exiting the business and those taking it forward) and of their families, retirement incomes and perhaps the provision of support and inheritance for those family members who do not wish to be involved in the farm. Succession is inevitable death imposes succession.

2. Farm ownership and farm assets Ownership of the farm and involvement in the day-to-day running of the business can be two very different aspects of any succession plan. When trying to devise a plan, you should ask yourself whether there is a real need to separate the two. Are there members of the family who are not involved directly in the farm business, but for whom you still want and need to make provision? The land and business ownership can be treated separately.

3.Taxation and professional advice Obviously the core group to be involved in the discussion process is the immediate family but care should be taken to include any relevant professionals - solicitors, accountants, land agents and financial advisers. Taxation (and possibly borrowing requirements) is a major consideration in any succession plan and professional legal, accountancy and valuation advice will be critical, and professional fees should be taken into account.

4.Wills, Partnership and Shareholders Agreements If you are determined to die "with your boots on and "be carried out of the farm that of itself can be excellent and wholly appropriate succession planning. If this is the plan make sure that you have a relevant and up-to-date will and partnership or shareholders agreement disposing of your farm and business interest as you wish and not as the general law dictates (which will be the position if you have no will).

Remember an old out-of-date will and partnership/shareholders agreement can be just as problematic as no will or agreement at all which brings me on to the need for .

5.Regular reviews and updates Any succession plan needs to be updated and reviewed, particularly if circumstances change. Changes may need to take account of marriages, deaths, or new additions to the family. Even if you feel nothing has changed, its still important to review the succession plan at regular intervals. This can be crucial, as something you may not have considered, could have an impact on the viability of the plan e.g. a second son suddenly deciding he too wants to farm.

Finally, in this context it is usually impossible to achieve equality in terms of treatment of farming and non-farming children or family members. What good planning can achieve is fairness which is generally all that families are looking for and is the best that you can probably hope for.

Anne Elliott is a Partner and agricultural law specialist at Latimer Hinks Solicitors. Anne is a member of the Agricultural Law Association as well as a Recommended Professional for the Tenant Farmers Association. In 2011, she was cited in the prestigious Legal 500 Directory for both her work on inheritance tax and in the areas of agriculture and estates. This was followed by a recommendation in Chambers 2012 for her expertise concerning, among other areas of law, the Agricultural Holding Act. Latimer Hinks has a team of around 40 people serving private and corporate clients.