Victoria (Mr Smith’s elderly mother and co-owner of the land) will soon be turning 90 and wants to ensure that the farm and land stays in the family, with effective tax planning.
She owns 50% of the land farmed by the Partnership, having previously farmed it with her husband, Albert, when he was alive.
Victoria is wise to seek advice. The farming business needs to have a partnership agreement and succession plan in place to reduce Inheritance Tax (IHT) and ensure the future success of the farming business.
Partnership agreement and succession planning
It’s common for farming businesses to trade as partnerships; however it can sometimes be the case that there is no formal agreement in place. As a first step, the advice to Victoria would be to ensure that an up-to-date partnership agreement is in place to provide clarity and ensure that valuable IHT reliefs will be available to be claimed on her estate.
Without a partnership agreement in place it can be unclear in the case of owner-occupiers whether the land, buildings and farmhouses from which the farming business operates are partnership property, or owned personally outside the partnership. This can have major implications for IHT.
For IHT purposes, each partner owns a share in the partnership. Under the current rules, if a partnership business is trading on a partner’s death, their share will be eligible for up to 100% Business Property Relief (BPR) subject to a two-year qualifying period. If the partnership includes the value of the property from which the business trades, that will also be eligible for 100% BPR. However, if the land and building are owned personally and outside the partnership, then BPR is likely to be restricted to 50%. This is important as Agricultural Property Relief (APR) may not be available on all property used in the farming business.
Safeguarding the future of the business
Key decisions will have to be taken as to what will happen to Victoria’s share of the partnership on her death. If Victoria and Mr and Mrs Smith as the existing partners of the business want to introduce new partners, perhaps Mr and Mrs Smith’s three children, they should consider putting plans in place now. A new partner can be introduced without assets having to be transferred at the same time, allowing a gradual approach to be taken.
It is often the case that the issue of fairness arises when considering a succession plan. It is important for the partners to consider those family members who may not be directly involved in the farming business, as this can be a potentially difficult area. However, there are ways around this such as using the proceeds of life insurance to transfer cash to heirs, and adding carefully crafted wording to wills and partnership agreements.
LPA for business interests
Business continuity is an important concern for many farming businesses. Ensuring that the business continues to run smoothly if the one of the owners becomes unable to continue working in it, through mental or physical incapacity, or through absence or a change in personal circumstances, simply makes good commercial sense.
As a partner, Victoria needs to consider what would happen to the business if she was unable to make decisions about its future. This is where a Lasting Power of Attorney (LPA) for business can be invaluable. Without this important safeguard, the business might face real problems if Victoria was unable or unavailable to carry out her duties.
Whilst it’s easy to assume that if Victoria wasn’t able to play her part in running the business, someone else, perhaps a family member could automatically take over her duties and responsibilities, as far as the law is concerned this isn’t the case. For example, they may not be able to access bank accounts or authorise the signing of contracts.
Entering into an LPA gives the person(s) she nominates as her attorney(s) the necessary legal status to run business affairs on her behalf. In addition, she can choose the roles she wants her attorney(s) to fulfil. For example, she could appoint one person to act independently on some aspect of the business, but jointly with others on, say, financial matters.
When considering a lasting power of attorney for business use, it’s important to refer to the partnership agreement as there may be clauses relating to the incapacity of directors or partners, and the LPA shouldn’t conflict with these provisions.
Along with creating an LPA, Victoria should ensure that she has a valid will in place. She may also want to consider using her annual IHT exemptions to pass on her wealth to the family during her lifetime.
This article is taken from our Agriculture Newsletter (Spring/Summer 2018 Edition).