Farm Succession Planning: Failure to Plan is Planning to Fail

With an unrivalled experience in financial planning spanning decades, at Francis Clark Financial Planning we often see a familiar occurrence when dealing with family businesses, especially in farming, an area in which we boast a strong expertise. Farms are often passed down through generations, which is key to their success. The next generation of farmers have typically been working all their lives amongst their family and therefore have a great deal of experience when they take over the business. However, we have witnessed the negative implications of a lack of farm succession planning when passing businesses on within families and the financial consequences of not having had those discussions early enough.

For many businesses, succession planning is a vital part of their long-term growth and business owners will have plans in place for their companies long after they retire to ensure its continued success. In the agricultural communities, the patriarch/matriarch – the head of family and farm, has usually grown up on the farm and the business is their way of life and their passion, so naturally there would be a large degree of emotional attachment. The thought of looking ahead and putting a plan in place is commonly perceived as a signal to retirement, a loss of control and therefore when combining all of this, it can sometimes lead to people avoiding the subject altogether. But the importance of farm succession planning cannot be understated. 

When meeting with clients for the first time, we always stress the importance of having a farm succession planning strategy and that failure to create one could mean putting their businesses at financial risk, as well as causing potential family disagreements down the line. There can sometimes be a lack of willingness from the next generation to take on the farm, which can consequently leave farmers working well into retirement or having no retirement at all. So, in short, at Francis Clark Financial Planning, we always stress this very important point – ‘failure to plan is planning to fail’

Farm Succession Planning: The first steps

The reluctance to start farm succession planning, especially when it involves generational farm businesses, is the first obstacle to overcome. However, discussions and creating future business goals, with all family stakeholders involved in the decision making now and in the future, are key.

Equally important is how and who you’ll hand overall control to. This forms a key part of farm succession planning strategies. Early open and upfront discussions enable productive input from all, and new ideas combined with knowledge and wisdom, can be a force to be reckoned with. It allows fruitful discussions to take place and plans can be rolled out earlier than retirement age, if you so wish, so that the fruits of your labour can be enjoyed. It allows entrepreneurship from younger, often enthusiastic, generations who may wish to make their own mark early on. Workloads can be shared; diversification can be a possibility if you so desire and more help and support is available for the ‘here and now’ which can ultimately shape the future of the farm. It allows a strong opportunity to ensure its success and productivity in years to come and will leave a legacy long after retirement for generations to follow.

The implications of not having implemented farm succession planning can be serious and have far-reaching effects. This uncertainty tends to lead to arguments between everyone involved in how the business will be run and more importantly by who. Again, this uncertainty and unclear direction can ultimately put the farm at financial risk until these issues are resolved.

Many of our clients’ key wishes are to ensure that the farm remains within the family. However, too often, due to a lack of discussions and more importantly inadequate time for a transitional period, younger family members don’t understand the key elements of the business/financial aspects involved in running the farm. Ultimately, the confusion created can result in losing a family business, which demonstrates the importance of farm succession planning.

Creating a long-term farm succession planning strategy

An important part of the farm succession planning process is writing down your long-term strategy on paper, which will help you to visualise your plan. Start those difficult conversations as early as possible with key stakeholders to allow you time to put these plans in place in a timely manner, ensuring everyone is in an informed position when making those final decisions.

As well as ownership and future goals, as part of creating your long term farm succession planning strategy, you’ll also need to think about the different financial implications that your plan might trigger. For example, inheritance tax (IHT), capital gains tax (CGT), pensions and life insurance policies. This is where we can help and support you throughout, providing you with solutions to those financial considerations. Our business planning services will address these issues. 

When formulating a plan, one key consideration in farm succession planning strategies is transferring ownership to the next generation. Therefore, one area to explore when ensuring the running and direction of the business remains in the hands of family members, is Partnership Protection, in conjunction with a partnership agreement. At Francis Clark Financial Planning we offer Business Protection services designed to provide business continuity. 

If a business partner dies or wants to leave when they are diagnosed with a critical or terminal illness, the remaining partners may want to buy their interest in the business and keep control. Partnership Protection Insurance will not only give the surviving partners the financial support they need to purchase their interest in the business, helping them keep the business running and retain control in difficult times, but also safeguard the business in the long term. This is particularly important if the deceased business partner’s spouse has previously had no involvement in the business or has a difference of opinion in the running of the business.

Splitting an asset between children

A scenario we often come across regularly in farming families with more than one child, is how the assets are to be divided. Especially if not all the children are involved in the business. Most of the time the Farmer will want to keep the farm as intact as possible, and so a question we are most often asked is, “how can we provide for our non-farming children?

An important consideration in farm succession planning that many people fail to understand is that splitting inheritance fairly does not necessarily mean equally. You will need to consider how to divide assets between the children and, importantly, are you comfortable with the split, whether that is equal or not and what involvement does everyone have in running the farm. 

When formulating a farm succession planning strategy, you should always look at all your assets that should be considered, such as farm cottages, pensions, savings, or buy-to-let properties. All these assets could provide you with a lump sum to give to your non-farming child/children.

With regards to pensions, there is an option to nominate your pensions upon death to those individuals not involved in the day to day running of the farm, as well as savings and cash funds. But in this scenario, it is important to work through the cost of inheritance tax, so you have an understanding of exactly what amount will be left for them after the tax bill has been deducted.

More often, if there are no or limited off-farm assets or the lack of appetite to divide the farm, you could leave the entire farm to all the descendants, with some or all of it in trust. This means that if land/farm assets are sold, the proceeds will be split between all of them. However, without farm succession planning, this could lead to arguments and can become complex.

Another other option that is regularly considered is a Whole of Life Insurance Policy written in trust. This will pay out a lump sum, upon death, to the individual(s) outside of your estate and the premiums could be paid by the farm business itself. Firstly, this can be far more cost-effective and will not put the farm under financial pressure to pay out or provide a lump sum through borrowing money to pay off their siblings and secondly, it ensures the whole farm remains intact.

Focusing on your pension

It is beneficial to look into how we use pensions when retirement planning to invest outside the business in a tax efficient way, which can provide an independent source of income in later life, separately from the farm. They can help you with your decision to gradually move aside and hand over more of the day-to-day management to your next generation within the family.

Pensions became more attractive following the 2023 Spring Budget which announced that the Pension Lifetime Allowance is to be abolished, therefore removing the limit to how much value can be accumulated in pensions over a lifetime. Although there were no major changes in the 2024 spring budget, within the 2023 budget, the Chancellor also announced the increase in the annual allowance (the amount you can save into a pension in a tax year) from £40,000 to £60,000, which is a further incentive to save money away from the Farm Business.

Pensions can offer protection from inheritance tax, and provide business owners with a tax efficient way to build up funds that can be left to non-farming children, as previously mentioned.

You should never put off those discussions but start them as soon as possible with those key individuals. Your options are far greater the earlier you start formulating a plan and potentially less expensive. Rather than waiting for problems to happen, by which time it’s often too late and expensive, the key is to have a plan in place, and it is always good to see it in writing.

Let us help you create a legacy

At Francis Clark Financial Planning, we can help you visualise your plan and provide solutions to meet all your needs, whether business or personal. This will help to give you reassurance and confidence in the knowledge that farm succession planning doesn’t have to be put off but is achievable and affordable for all parties involved, particularly if you look to do it early. So remember, when you next sit down and enjoy a family meal, it’s never too early to think about the future. Remember, ‘failure to plan, is planning to fail!’ So don’t delay, or put off the inevitable, contact our dedicated team today and let us help you create a legacy that will be securely and safely handed down through your family for generations to come.

A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age). The value of your investments (and any income from them) can go down as well as up which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change. You should seek advice to understand your options at retirement.

The information contained within this article is for guidance only and does not constitute advice which should be sought before taking any action or inaction.

The Financial Conduct Authority does not regulate taxation advice, estate planning, inheritance tax planning or trusts.

For more information on how Francis Clark Financial Planning can help you form a farm succession planning strategy with our business services, contact our team of professionals today. Safeguard the future of your farming enterprise and secure peace of mind for you and your family.