How to structure for your business for future successs

As advisers we often get asked what the best structure for future succession is. There is no right or wrong answer as every situation is different.

Historically we have seen many partnerships where the property and the farming assets are owned by the partnership. There are still a number of these structures around and while they have worked for the historical farming operation, they can be problematic on the death of a partner or when trying to bring in the next generation.

There are very specific ways in which the assets must be dealt with upon death or changing the partners in the partnership. These can be both complex and not always the most taxeffective structures to get out of.

In more recent times we have seen structures made up of a land-owning trust, with a farming company carrying out the day-to-day farming operation.

The farming company can be a far simpler vehicle for transferring to the next generation or changing the ownership of the farming entity without having to deal with the transfer of the land at the same time. This structure can afford some flexibility in the staggered approach to farming and business succession while leaving the land asset in the trust. In recent times some of these types of structures have been less tax effective than in the past – as rising interest rates often mean that the interest cost can begin to outweigh the market lease income that is being paid for the land. This can result in a loss in the trust while the company which is carrying out the farming activity has a taxable profit to deal with.

Trusts and companies both have their limitations, but both provide for asset protection to some degree which can be an important part of the family succession discussion.

The changing landscape of trusts needs to be considered as these entities become more complex with enhanced compliance and the risk associated with being able to gain an independent trustee.

Reporting requirements with IRD and increased beneficiary rights all add to the complexities. The proposed increase to a 39 per cent tax rate also brings to question the tax effectiveness of trusts going forward.

Companies in their very nature do provide for a more seamless transition of ownership from one generation to the next on the basis that careful management and consideration of a desired succession outcome can be achieved with planning and robust family discussions.

It is important to note that whatever structure is being utilised for succession the treatment of the underlying assets and the value attached to them still needs to be considered from a family perspective to ensure any split of assets is fair and equitable to all parties.

The hardest decision when it comes to dealing with succession is when to start and how to deal with both the farming and non-farming successors as well as ensuring that the current farmers are taken care of in a manner that doesn’t provide them with financial duress in their retirement. Therefore, starting early on a plan is important to ensure there are sufficient net assets to enable the plan to be implemented. Discussing your initial thoughts with your advisers is an important step in the right direction.