By Alexander Garden, Partner and Head of Tax & Succession and Hannah Starritt, Solicitor

This article originally appeared in Scottish Farmer on Saturday 21st October 2017.

With the average age of Scottish farmers increasing, succession is a big issue for many involved in agriculture, but not made any easier by the uncertainty around subsidies, taxation and succession rules. The key is advance planning. Inheritance circumstances, commercial factors and taxation all need to be taken into consideration.

Succession

The starting point for anyone, whether or not they are in the farming industry, is their Will.

It may seem obvious but, a well drafted Will ensures that your assets pass to the intended beneficiaries on your death. Intestacy (having no Will) creates ambiguity and can be very costly.

A Will can also provide how assets should be managed after your death. For example, a trust in a Will can provide that assets are held in a certain way and are distributed only in certain circumstances, allowing some control over assets following death.

A point to note is that whether or not a Will is in place, moveable assets, which is everything other than land and buildings, could be subject to a legal rights claim; the right of certain family members to claim an inheritance under law.

Asset Protection and Lifetime Planning

Advance lifetime planning can also ensure that assets:

  • are protected during your lifetime;
  • are not in your estate for Inheritance Tax (IHT); but
  • remain to a certain extent under your control.

Partnerships, trusts and companies can all have a role to play here.

Lifetime planning can also be very effective in bringing the next generation into the business gradually, as well as protecting assets from risks such as creditors, legal rights and tax.

When gifting, during lifetime care needs to be taken so as not to retain any benefit in the asset gifted otherwise there is a risk that it will remain in their estate for tax purposes.

Tax

The main tax in this context is IHT which is not a devolved Scottish tax.

IHT is currently charged at a rate of 40% on assets in the deceased’s estate over the value of £325,000, subject to any available exemptions and reliefs. Assets passing to spouses or civil partners are exempt.

Two important reliefs, in the context of the farming industry, are Agricultural Property Relief (APR) and Business Property Relief (BPR), which both have the potential of providing up to 100% relief from IHT on certain assets depending on the nature of the assets and how they are used.

The policy intention behind these reliefs in the farming context was to prevent IHT from being a burden on farming families where payment of tax could force a sale of the asset from which that family draws its income.

The reliefs are clearly very valuable but if not managed carefully can easily be lost leaving a potentially large and unexpected IHT liability on death. Also, as with all taxes, any planning must also consider the possibility that rules might change in the future.

The key to avoid any of the above risks becoming a reality is to review matters early and plan ahead, taking into account the individual circumstances, commercial considerations and taxation. Keeping matters under review periodically is also essential.