Jill and Rob looking over their field

Real Family Finances

The family business: Planning for the future

Why it’s important to make time to discuss passing down the family business

When you’re running a family business like Rob and Jill Davis, finding the right moment to discuss how and when the next generation will take over can be difficult. NFU Mutual Chartered Financial Planner Richard Foreman explains why succession planning should be a priority.

Rob and Jill Davis know they should discuss their plans to pass their family business to their two daughters; the problem is finding the time.

Many farmers and small business owners are in a similar position — keen to hand over to the next generation, while grappling with the complexity of the day job.

Even the closest families can find some subjects a little sensitive, and business succession planning can be one of them.

It's never too early to begin planning

Succession planning can be complicated and there is no one size fits all solution. However, the earlier you start to plan the more options you will have open to you.

Planning ahead means the transition will be smoother and will help secure the future of your farm and business.

You can set a pace for change

Some owners find it hard to give up a business they may have been running for years, and then sit by and watch others make decisions they may not have made themselves.

But change doesn’t have to happen overnight.

Passing on a business does not have to be an all or nothing decision. One option is for older family members to retain ownership while passing more of the day-to-day management to sons or daughters.

You can maintain oversight and can steadily pass on ownership at a pace that works for the family.

The handover process often works best when phased in over a number of years, allowing the younger generation to build their knowledge and experience.

Involve your family

Every family member needs to be involved in the discussion, while differences of opinion need to be managed carefully.

Having an independent party present as a mediator at family meetings can help families to tackle difficult personal issues and reduce potential conflicts by making sure everybody's voice is heard.

When it comes to making provision for those children who do not wish to be involved in the future of the business, there is a wide range of investment options that can be utilised as part of the family’s plan. An NFU Mutual Financial Adviser can help you look at some of the options.

Four critical issues to consider

  1. Wills — make sure all members of the family involved in the business have valid wills and, where appropriate, a partnership or shareholder agreement is in place. This will ensure the ownership of the business ends up in the right hands at the right time. 
  2. Tax — making sure the plans are structured in the most tax-efficient way is critical to successfully passing on the business. Two key taxes to consider are Inheritance Tax (IHT) and Capital Gains Tax (CGT). Agricultural Property Relief and Business Property Relief can help to reduce or even eliminate IHT on farming and other qualifying business assets. There are a lot of potential traps, particularly for diversified farms, so it’s important to get advice to maximise the benefit. Giving away assets can trigger a CGT bill. It may be possible to claim Hold Over relief, which allows any immediate CGT to be deferred, with the person receiving the gift taking over the gain of the original owner. Relief can be claimed on qualifying agricultural and business assets and gifts into certain types of trust.
  3. Pensions — these can play an important part in succession planning. They can provide a source of income for the older generation which may allow them to take less from the business. Pensions can normally be passed on free of IHT and many farmers continue paying into one until the maximum age of 75, with the added benefit of also claiming tax relief on their contributions. The younger generation may also be able to use their pension funds to buy farm land and/or commercial property from the older generation, via a self-invested personal pension (SIPP), as part of the family’s wider succession plan.
  4. Divorce —it’s important to consider what would happen in the event of a son or daughter divorcing in the future. Pre-nuptial agreements can help protect the family business. Getting the right legal advice in this area is essential.

Take the first step to succession planning

Thinking about creating a succession plan for your own business? Find out more about our Financial Planning Service.