Date24 Jun 2021
There is a saying that one generation earns the wealth, the next maintains the wealth and the third generation spends the wealth. Breaking this cycle is important, and as custodians of “the wealth”, one of the biggest responsibilities for the family is to plan for succession.
Reasons for succession planning vary from family to family, but common triggers are:
It is easy to find reasons to avoid succession planning. Fear of conflict, too difficult, don’t know how, bad past experience, not their job, and fear of what next are all good reasons for doing nothing. The earlier a plan is made however the more options there are available. It is a long term strategy that requires thought and buy-in from all parties involved.
There are many tax implications related to the transfer of assets and these can have a large effect on those inheriting assets and businesses, especially those not covered by agricultural property relief.
Decisions on the division of assets within a family have long term implications. The aim is to have good communication with all parties to minimise the risk of expensive family conflicts and division which can occur many years in the future. It is useful for families to openly discuss the issues in order to reach an equitable or practical solution.
Once the business and family issues are understood, the starting point is often to look at the financial statements to establish who owns what, how much is it worth, is the farm on or off the balance sheet and ultimately assess what each family member’s shares or capital account is actually worth. Because financial statements record property at historic cost, there is usually a need to revalue farms to market value. Depending on what stage the succession journey is at would influence whether an informal estimate of value is sufficient or whether a professional valuation is required.
Accountants are not valuers, and whilst we have knowledge of potential values, in order to be independent in our role, often it is a good idea to have the farm properties professionally valued. An independent valuation is very useful when considering division of assets, and also to assess the tax implications of any restructuring work. It is also important to consider any partnership or shareholder agreements in place as these often specify the process and timescale for paying out an exiting family member.
After real values, pension funds and potential tax liabilities are established, the next stage is to consider income requirements of the different generations, review existing bank debts and assess the capacity of the business to repay existing or potentially take on new debt, and also consider the options for creating separate businesses allowing family members control of their own destiny.
Once all these facts are assembled, formulating the plan and getting it written down in black & white for review and revision is the second hardest part, after actually starting the process. The written plan may contain a series of different options, with the pros and cons of each. Encouraging all parties to discuss and build the plan will assist with buy-in.
Some families feel the pressure is relieved by having input from their trusted advisers and we are happy to be an integral part of the process. We are working with many farming and estate clients to assist them with tax and succession planning. Integral with succession planning is the review and update of Wills for all parties involved.
Inheritance tax is considered by some to be a voluntary tax, but charged at 40% mistakes can be expensive. Death is a certainty, inheritance tax we can plan for.
If you would like to discuss succession planning and the options available please speak to your usual contact. Or email us firstname.lastname@example.org