The Covid-19 pandemic has highlighted the importance of succession planning. Reviewing your business structure is a good place to start.
“How can I plan for succession when my family is still very young and I don’t yet know who will succeed me?”
The answer is it is never too early to start planning. Your objective should be to structure your business in a way that protects you and your family now and will not disadvantage you in the future.
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. You will need to review your structure from time to time and you may need to switch to an alternative structure as your business develops and/or family circumstances change.
Traditionally, most farmers start out as sole traders which means that they trade as an individual rather than as a partnership or company. 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. So, 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 partnership structure is a step up from sole trader. This 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. It 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.
Over the last 10–12 years, many profitable farms have adopted the Limited Company structure. A key benefit of this structure is that profits retained in the company (i.e. 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 it is worth considering involving the next generation. 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. 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. With proper advice and timely planning potential problems can be minimised and/or overcome.
Make a Will
Irrespective of your age—and the age or your family—drafting a valid Will is the first step on the path to succession planning. 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 has recently published two new guides designed to help farmers plan ahead — the Farm Structures Guide and Farm Succession Guide. Both documents provide practical advice, checklists and case studies. They are available for download on ifac.ie.
· When reviewing your business structure, make sure that you do not disqualify yourself or the next generation from potential tax reliefs.
· It is never too early to write your Will and plan for succession.
· Get professional advice when writing your Will as drafting mistakes could mean that your Will might not be valid.
· Review your Will and Succession Plan at least once a year to ensure that they continue to reflect your wishes.