Today is Martinmas, a significant date in the farming calendar.

Traditionally one of the “term dates” when contracts and leases begin and end, and rents are collected, it coincides with the completion of the harvest and the coming of the winter season.  For professional advisors working in the rural sector, it is one of the busiest periods in the year as there is a rush to complete new lease arrangements, agree agricultural rent reviews and, if you are especially unlucky(!), make last minute applications to the Scottish Land Court…

There’s a lot more than rent review and new lease agreements happening on Martinmas 2024. Today we are seeing Scottish agriculture rallying at Holyrood in the hope of ensuring that the interests of farming and the rural economy are high on the agenda when the Scottish Government’s budget is delivered on 4th December (NFU Scotland | /rally-at-scottish-parliament-2024.aspx). This is not about the well-publicised changes to inheritance tax rules, referred to by some as the “family farm tax” (inheritance tax being reserved to the UK Government in Westminster). Instead, the focus of today’s rally is on Scottish Government controlled issues and, crucially, the call from the farming industry for a commitment to ring-fenced support for agricultural businesses in Scotland. It is, however, difficult to separate these issues in the minds of farmers as ultimately the policy decisions in both Westminster and Holyrood have a direct impact on the economics of farming. As has been well-publicised in recent weeks, the yield from agricultural land is low and the combined impact of policy changes from both governments is likely to stretch already-thin margins to the limit.

The agricultural industry has shown itself to be resilient and adaptive, but many farmers are increasingly worried about how they can protect and grow their businesses in challenging economic circumstances and ensure that they are able to hand over a viable operation to the next generation.

Succession planning under the new inheritance tax regime means that different solutions may be needed – but the approach to ensuring a smooth and successful transition of the farm business to the next generation will, for the most part, remain the same. Here are our top tips.

1. Open communication

Always a tricky one. “The biggest mistake that people make with communication is thinking that it has happened.” is no truer than in family businesses. In an ideal world, best practice is to set up a meeting, if possible in a neutral space and with an external party present, not only to help to minute and possibly facilitate discussion, but also to try to avoid everyone from regressing to their teenage selves! 

Foster clear and ongoing discussions among family members about the future of the farm, individual role and expectations. 

2. Assumptions

Don’t make any! Time spent gathering information on the ownership, tenancies, current business structures, accounts, levels of borrowing, etc is essential. Without this information the parties will not be able to make clear decisions and will help to align goals and reduce misunderstandings. All too often, avoidable disputes and upset arise simply due to assumptions being made.

3. Involvement of successors

“When should we involve the next generation? is an oft asked question. As a parent there is a natural desire to cushion younger family members from the realities of the business, but it is essential that the next generation are involved and informed in order that they too can fully assess their own futures within or potentially outwith the business. With in life gifting now being a much more likely succession planning option, it is essential that the younger generation get the full picture before agreeing to be part of the business, it is worth remembering that involvement brings with it liability as well as benefit! It is essential that there is full disclosure to ensure a smooth transition.

4. Establish a succession plan

Once this is bottomed out it is then possible to create a formal succession plan that outlines the desired transition process, including timelines. However it is worth remembering that succession plans, like birth plans, do not always go to plan! This document should be regularly reviewed and updated as circumstances change.  

It is however worth noting that for plans to be of any use, they must be fully implemented. This is a plea to all, don’t just put it in a drawer – that does not work! 

5. Financial planning

Assess the financial health of the farm business and develop a plan to address any potential tax implications, such as inheritance tax. This issue is very much to the fore at the moment, in light of the new rules, but should always feature in any assessment of the financial position of the business. Keep in mind that tax is an important consideration – but it is not the only consideration when making a succession plan.  

6. Document it!

Partnership agreements, properly documented tenancies, powers of attorneys, properly drafted wills, and other legal documents that clarify ownership and management of the farm now and in the future are essential. In particular, in the case of partnerships, ensure that there is an up to date written partnership agreement in place, regulating the business. This can help minimise disputes and help plan for unexpected events.  Bear in mind that the wider family dynamics can have an impact on intended succession plans, particularly in the event of “legal rights” claims on death or divorce. This is a complex area and expert legal advice must be taken to avoid unforeseen pitfalls. 

7. Diversification

Explore diversifying the farm’s operations to create additional revenue streams. This can enhance financial stability and provide more opportunities for family members to engage in the business in different ways. 

8. Retirement planning

Consider the retirement plans of the current owners of the farm business. Contrary to popular opinion, some farmers do occasionally retire! Establishing a clear timeline for when they will step back can help facilitate a smoother transition.

9. Get the right team in place

Assemble a team of trusted professionals, including financial advisors, legal experts, and agricultural consultants, who will work together to provide appropriate guidance throughout the succession planning process. 

10.  Regular review 

Periodically revisit and revise the succession plan to reflect changing family dynamics, market conditions, and your objectives for passing on the business. This ensures that the plan remains relevant and effective over time. 

Robust succession plans that not only preserve a generation’s legacy but also positions the business for future success can be delivered upon. With Christmas just around the corner, knowing the family can sit down for Christmas Dinner without underlying tensions will be the best gift for any parent. 

Our rural business and private client teams are well versed in helping families, individuals and businesses to plan for the future. Please get in touch with Linda Tinson or Lorna McKay if you need help with or want to discuss anything raised in this insight. 

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