1. Succession in farm business Brexit
IAgSA 50th Anniversary Conference
Succession in farm business
Brexit
James Attrill BSc (Hons) FAAV FBIAC
Partner – Rural Consultancy - BCM

2. James Attrill BSc (Hons) FAAV FBIAC
Partner – Rural Consultancy – BCM
Helen King FCA
Partner – Ellacotts LLP- Chartered Accountants and Business Advisers

3. “Inheritance during our lifetime”
1. Succession
So you want to succeed
“Inheritance during our lifetime”

4. What we think should happen ….

5. What could happen ….
Cow-shed Cinderella

6. Family Businesses – The Wider Picture

7. Family vs Non-Family

8. Who Husband Wife Children Grandparents Grandchildren
Uncles, Aunts …. others

9. Why Death – forced Retirement - voluntary Dispute - involuntary
Successor’s Age – young or old
Practical – physical & managerial
Tax (Inheritance)

10. What Managerial Control Working Capital Property Shares Loans
Tenancies
Other

11. Entity Partnership Limited Company Sole Trader ….. biggest change
Tenancy ….. AHA, FBT, family

12. People Assets Business PLAN Who is to be involved? Objectives? Needs?
Business structure - current and potential
Aims/needs for short, medium and long term
Values and tax
Ownership
Uses - current and potential
Who is to be involved?
Objectives?
Needs?
People
Assets
Business
PLAN
This diagram summarises the main components of succession planning from our perspective
People – who is to be involved with the business and what are their skills / will this be different to the underlying ownership of assets (who?)
What are the objectives of the individuals involved?
Assets – what are the assets? There will be the value of the business itself – live / deadstock, plant and machinery, freehold improvements; and also the underlying property assets – for example ownership of land or the tenancy from which the business is carried on (what?)
Business – what is the business and how is it structured? Should it be restructured?
Use this as a basis for building a plan – but don’t dwell for too long on what form the plan should take – it’s more important to start the process and agree to periodically review
Consider these three areas….

13. Assets and ownership Check your documents Tenancy agreements
Partnership agreement
Wills
Accounts

14. Assets and ownership
What do you own, how do you own it, and what do you use it for?
Who owns what (BENEFICIALLY)?
What is partnership property?
Held as tenants in common or joint tenants?
Is any rent paid?
Legal vs. beneficial ownership
Sort any inconvenient joint ownerships in this generation if you can=> but tax positions can be crucial
COMMUNICATION- open and honest- best in the end- to achieve best outcome
Is everything consistent? – ie partnership accounts, agreement and wills?
Partnership Agreement => perceived fairness; tax advantages from thinking structure through

15. Ownership of the farm Transfer of assets during lifetime or on death?
Inheritance tax on value in excess of £325,000
Availability of inheritance tax reliefs
Agricultural Property Relief
Business Property Relief
Ultimately driven by wishes and needs of current owners…
Don’t ignore the needs of current owners – income and capital
Transfers during lifetime or death
Transfers during lifetime offer certainty
Transfers on death can provide tax benefits – in particular the chance to ‘re-base’ assets – opportunities re development land
Consider availability of IHT reliefs
Agricultural property generally provides the scope to transfer value to the next generation in a tax efficient way
IHT considerations will be part of the decision making
Individuals currently have £325,000 nil rate band each, but the new ‘main residence nil rate band’ phased in but in full from 2020/21
Consider protection of asset value and review likely IHT liability and how this will be paid
This will identify ‘problem assets’ – might be possible to improve IHT position through restructuring
When considering IHT – the two main reliefs available:
APR –land (and buildings) occupied for the purposes of agriculture
BPR – relief in respect of business assets and interests in a business

16. Inheritance Tax Farmhouses – do they qualify?
Watch non-agricultural value – eg hope value
Non-qualifying assets – eg let buildings
Make gifts to next generation
Consider non-farming children
HMRC increasingly challenge reliefs- even whether bare farmland is agricultural – there needs to evidence of occupation
Farmhouses – subjective area – consider lifetime gifts wherever possible
PPR relief available to remove gain that would arise
Survive 7 years and then completely outside of estate
Protection of non-agricultural value
Relevant currently with increased land sales
Subtle difference of land owned by a partner outside a partnership – 50% relief vs land held as partnership property – 100% relief
Similarly land held outside a limited company – 50% relief, but needs to be held by controlling shareholder
Worst case is that assets sold shortly before death – swapping qualifying land for cash, which might not qualify for relief
Non-qualifying assets
On the face of it, the value of let property would not normally qualify for BPR, but if held as a partnership asset and partnership is not one of wholly or mainly of making investments – generally more than 50%, then should qualify for relief (Balfour and Farmer cases)
Again – importance of records to support – accounts, prp agreement etc
Turnover, profit, time, capital value
If there are assets tipping the balance consider gifting – however, will give rise to a capital gain when gifted to connected persons. My view is don’t want crystallise a tax charge unless there are capital proceeds out of which to pay
Ways around – use of trusts?
May have assets that will cease to be agricultural – eg barns for conversion
Consider gifting before cease to be used by farm as holdover will still be available and will be gifting at lower value
Use of term assurance

17. “I’m sorry son but one day this will be yours …”

18. Where to Start - Documents
Partnership Agreement
Share Holders Agreements
Tenancy Agreement
Will
Loan Agreements
Deeds

19. Partnership Agreement
Have written rules!
Partnership Agreement
WILLS
Accounts

20. Flashpoints Who is succeeding ? What capital share ?
What profit / loss share ?
Voting rights: day to day / capital decisions
Rights to veto
Retirement criteria
Sale of property / shares to 3rd Parties

21. Accounts – Suddenly Interesting !
Property Capital – land, buildings, houses
General Capital – machinery, inventory, deadstock – can’t be nil?
Share Capital
Loans – bank, personal & directors
Current Accounts – positive, negative

22. The Property Owned : Who by ? Registered with Land Registry ?
Farm Business Tenancy : In who’s name ? Assignable ?
AHA : In who’s name ? Succession criteria met ?
Contract Farming Agreement : In who’s name ? Assignable ?
Annual Grazing Agreements : No !

23. Now you see it … now you don’t
Acres
Owner
Destination
Ok?
Land at Home Farm
450
Father
Farming Children
Land on Edge of Town
100
Father’s Pension Fund
Father’s Pension
Land on 15yr FBT
150
Lord Steady’s Trustees
Lord Steady’s Children
Land on Pre-1986 AHA
300
300 ?
Land at Over-the-Hill
Grandmother
Non-Farming Grandchildren
1300
750

24. Other Capital Gains Tax tax reliefs
Protection of value from tax
Entrepreneurs’ Relief
Rollover relief
Holdover Relief
General points- READ THE RULES/ CHECK THE FACTS/ NO ROOM FOR FUZZY LOGIC
Basic CGT rules to remember:- (apologies- worth restating the obvious)
Each beneficial owner makes their own claim- nail facts for each taxpayer- “we”/”the family” are not relevant- look at each separately- often beneficial ownership is not what clients believe. Land Registry info not relevant- BENEFICIAL, not legal, interest
Remember inter-spouse transfers done at no gain/no loss, regardless of price paid
Other connected parties tfr at OMV
Check CGT base cost & history thoroughly before proposing a plan. Some assets held since “start” date of significant gains
Remember to add any bf Rollover Relief/Holdover Relief to your “roughed out” gain
Watch where any CGT is due before proceeds received
Watch joint development proposals/ balancing payments
Take advice

25. Entrepreneurs’ Relief
Main rate of CGT – 20%
With Entrepreneurs’ Relief – 10%
18% tax saving on £1m = £180,000
Amounts involved are significant-£10m lifetime limit
PLAN, PLAN, PLAN- doesn’t happen by accident! Detailed planning needed.
Rules are layers of “wallpaper” over cracks due to poor drafting
Entrepreneurs’ Relief is potentially available on:-
Disposal of the whole of part of a business, owned for 1yr prior to disposal
Disposal of assets in use when business ceases, & for prev 1yr, sold within 3yrs of cessation
Disposal associated with withdrawal from the business
Restrictions if rent paid, or incomplete business use (either incomplete in terms of time, or space)
Check the facts:
Any rent paid? Any non-business use?
Are there any “tame” family members to involve in business who can then retire?=> form a plan
Possible planning tools:-
H&W partnership-if gain <£10m, put valuable asset into hands of one spouse, who can retire on sale;
Adj ownership to use > 1 £10m Entrepreneurs’ Relief limit
Create separate business, that can cease- if plausible
Have part of business cease- eg cattle ceased when tranche of land sold
Bring in children to pass interest in partnership to, facilitating Entrepreneurs’ Relief. Robust plan/ Partnership Agreement with partnership Balance Sheet to support.

26. Rollover relief Sale of asset and reinvest the money Do you qualify?
There needs to be a link between the asset and the business
Watch where asset ownership and business are different
PLAN, PLAN, PLAN- doesn’t happen by accident!- refer to H M Revenue & Customs HS290
Think of money “piped” from old to new assets- disciplined thought needed. Business Asset Rollover Relief defers any Capital Gains Tax due when you dispose of certain assets (called ‘old assets’). If you acquire other assets (called ‘new assets’) costing the same as, or more than, the amount you got when you disposed of the old assets, the relief allows you to postpone paying tax until you dispose of those new assets. (Great for older clients- rolled over gain dies with them)
Restrictions- assets used in the trade (new and old)? Match ownership (new & old).
You can claim relief if:
Trading/ FHL business (H M Revenue & Customs rules)/ commercial woodlands and managed commercially to make a profit/ profession, vocation, office or employment/ providing an asset to your personal company/ disposed of land by a compulsory purchase.
Each beneficial owner makes their own claim
Both old & new assets must be:
interests in buildings or parts of buildings
interests in land
fixed plant or machinery
ships, aircraft, hovercraft, satellites, space stations and spacecraft
goodwill
milk, potato or ewe and suckler cow premium quotas
fish quotas
payment entitlements under the single payment scheme or basic payment scheme
Lloyd’s syndicate capacities
Strict timeline [v strict if purchase made in anticipation of sale]- date when contract becomes unconditional- sometimes deliberately have a condition that cannot be met until vacant possession possible
Provisional relief exists- evidence of search if 3yr window nears
Fixed P&M- 10 year deferral- intensive livestock/elderly client WIN
Watch farmhouse- restricted/nil ROR
Apportioned relief if gain on old asset not used in trade throughout (e.g. let out)
No apportionment for new asset- “guillotine decision “on day of completion- e.g. delay completion until vacant possession available- importance of good solicitor & good accountant. Can have conflict with other rules- eg VAT rules- 360 degree vision needed.
Watch lot values- need to be justifiable – but you choose structure of claim (NB also allowabilty of interest if for let property/ farmhouse- what is purpose of borrowing?)
Exchange of joint interests- “excess” is taxable.
Watch houses- PPR rarely in point. Reliefs problematic if sole ownership of home not achieved.

27. Holdover Relief
Defers liability- donee picks up on their later disposal
Hold-over Relief may be claimed for gifts of
business assets
unlisted shares in trading companies etc
agricultural land
gifts which are chargeable transfers for Inheritance Tax purposes
Hold-over Relief may be claimed for gifts of
business assets
unlisted shares in trading companies etc
agricultural land
gifts which are chargeable transfers for Inheritance Tax purposes
certain types of gifts which are specifically exempted from Inheritance Tax
Where agricultural land does not qualify as ‘business assets’ because not used for donor’s trade, it can qualify for Hold-over Relief if agricultural property for the purposes of Inheritance Tax. This covers Hope Value, not just ag value (contrast with IHT APR rule)
Watch trading status- NB also IHT implications- keep co trading for 7yrs to protect IHT posn (risk with diversified business- younger generation often ambitious for change- reign them in for 7yrs). “Trading”= not wholly or mainly investment- turnover/assets/ profit/management time etc

28. Summary
All businesses should review their succession plans and potential IHT liabilities
Restructure if necessary
Consider other tax reliefs
Entrepreneurs’ Relief
Rollover relief

29. Are you a succession planner?

30. Lucky Lad?

31. Action ! Structured & timetabled – “war room” Agenda – agree it
Family first then accountant & solicitor
Independent chair ?
Meetings – off site and cooling off periods
Tax , tax & tax - Annual review

32. Succession- consider all taxes
Ownership
Use
&
VAT
SDLT
Income Tax
IHT
CGT

33. Succession –tax tips List who owns what, what its used for, & value
Your pension pot?
Capital Gains Tax position of assets, & reliefs
Inheritance Tax position of assets, & reliefs- life cover?
Honest, fair consideration of owner’s wishes
Who and what needs protecting?
Communicate, and sort it- don’t leave a battle

34. 2. Brexit
Known unknowns …..

35. Brexit Direct support Trade Regulation Labour availability

36. Total Income from Farming
1990 to 2016 (Real Terms – 2014 Prices)

37. It’s all about the Euro……
1999 to 2013

38. CAP Funding in the UK
2010 to 2014

39. DIRECT SUPPORT – Short Term
BPS confirmed to 2020
Uncertainty over new Countryside Stewardship
Capital Grants (LEADER , RDPE, etc)

40. DIRECT SUPPORT – Long Term
Cross Party dislike of BPS type system
Popular lobby (RSPB, etc) for 100% environmental payment
Unlikely new rate will be greater than current BPS
More targeted – Hills, Organic, Livestock, Small Farms ?
Options ; - No change ~ LOW
- Remove all together ~ LOW
- One-off Capital “bond” payment ~ LOW
- Less £ for more environment ~ HIGH

41. Land Prices – England & Wales
1945 to 2015

42. UK – EU Trade Patterns

43. UK Exports to EU

44. Trade EU has 50 deals with non-EU countries
UK starting “from scratch” – who sorts ?
Poor relation vs financial services / manufacturing ?
World Trade Organisation (WTO) is default position – very restrictive

45. Regulation EU Law – applies until we leave!
What replaces “EU Law” – 90% of DEFRA regulation – adopt “on block”
Current DEFRA Ministers saying “Cross Compliance will be cut back”

46. Regulation CAP – eg. 3 Crop Rule
Nature Conservation – eg. Newt surveys
Plant Protection – eg. Use of Round-Up
Energy – eg. Need for EPCs
Environmental – eg. Nitrate regulation compliance
Tax - !?

47. Labour 2015 – 30,000 non-UK nationals permanently in agriculture in UK
2015 – 67,000 seasonal workers
SAWs Scheme – limited to 21,250
Will UK retain “freedom of movement”
Political sensitivity vs “sympathey” for agriculture
Hope : 1 in 4 employed in tourism / hospitality are non-UK nationals