Succession and continuity are vital components in the sustainability of a farm business, with a key goal to structure one’s business in a way that protects both you and your family now – while not putting you at a disadvantage in the future.
However, this can be a complex objective, so agricultural professional services provider Ifac has offered some helpful advice in figuring out what works best for you.
According to Ifac, farm businesses operate under one of three business structures — sole trader, partnership or limited company.
When deciding which structure is right for you, it’s important to take into account how you want your business to develop and who will eventually succeed you, the firm notes.
Farmers will need to review their structure from time to time and one may need to change to an alternative structure as the business develops and/or family circumstances change.
Farm business: Sole trader
Traditionally, most farmers start out as sole traders – which means that they trade as an individual rather than as a partnership or company, Ifac says.
An advantage of the sole trader structure is that all of your farm income belongs to you and, once you pay the relevant tax, you can spend the money as you wish.
However, a disadvantage is that all of your profits (less capital allowances) are taxable – regardless of whether you extract profits from the business or not.
Therefore, if your farm is very profitable, this can lead to large tax bills. This is why the most profitable farms usually adopt an alternative business structure, the accounts firm says.
Succession option: Partnership
Next up, the partnership structure is a step up from sole trader, Ifac says.
This, it is noted, has “tangible business benefits” in that partnerships can secure more grant aid, have a lower tax liability and better succession planning opportunities.
Partnership also has a social advantage as it involves interacting with your business partner on a daily basis. This can help to counteract the loneliness and isolation that farmers sometimes feel.
However, as in any relationship, disagreements can arise so every partnership should have a Partnership Agreement. This document needs to be formally drawn up.
This agreement sets out the terms that the partners have agreed, including if and when the partnership will be dissolved, and how any disputes that may arise will be resolved.
Limited company
Over the last 10–12 years, many profitable farms have adopted the limited company structure, Ifac notes.
A key benefit of this structure is that profits retained in the company – that is, profits that are surplus to what you need for your living expenses – are taxable at 12.5%.
While forming a limited company introduces some complexity in terms of running the business, on very profitable farms the benefits usually outweigh the disadvantages.
When setting up a limited company, involving the next generation is an option worth considering, the company says.
Introducing family members as small percentage shareholders can help to prepare a pathway for succession. A properly drawn up Shareholders’ Agreement helps ensure everyone shares a common understanding of the business plan and their individual roles and responsibilities.
As well as fears about the perceived complexity of the limited company structure, another common misconception is that if you buy land through a company you have to extract the land when passing on the company. This is incorrect, Ifac says.
The land can remain in the company and pass on with the company shares. Provided the land in question was farmed, it may qualify for Business Relief.
In the past, most farmers were sole traders or farmed in partnership with another business owner, however as incorporation becomes more popular, there are a significant number of farms where successors will inherit a limited company.
From a succession planning perspective, this requires careful preparation – particularly if there are legacy issues such as debt or tax liabilities in the company.
However, with proper advice and timely planning potential problems can be minimised and/or overcome, the advisory firm says.
Making a will
Meanwhile, irrespective of your age—and the age or your family—drafting a valid will is the first step on the path to succession planning, Ifac stresses.
As your life stages change, and particularly when you move from being a single person to a married person, you will need to update your will as marriage will invalidate an existing will.
If you do not have valid will, succession is determined by the provisions of Succession Act of 1965.
When drafting your will and succession plan, as well as ensuring that they reflect your wishes, it’s important to make sure that your plans are tax efficient and make sense for you, your successors and your business.
Remember that a plan in your head only becomes valid when it is properly documented, Ifac concludes.