Exit route needs proper planning

Attracting a steady flow of young farmers is at the core of building growth in the rural economy, and securing a sustainable future for the agricultural industry in Scotland.

That’s a challenge, and much like the complex issue of succession planning, it’s one that has dire consequences if it’s not successfully tackled.

It’s well known that farming stands apart from many other business sectors as a way of life, and because farmers are living longer, and the farm business is likely linked to housing, there’s a low exit rate.

In fact, compared to the general Scottish population, the proportion of occupiers aged 65-plus has, in recent years, been increasing at a faster rate than in the population as a whole.

Proper planning, together with professional legal and financial support, however, can make successful succession and retirement certain, while ensuring a smooth transition into the business for the next generation.

The real issue standing in the way of passing on the farm business is often lack of financial security for those retiring.

Absence of pension provision and basic life insurance, or indeed critical illness cover, is commonplace, as is the widespread desire to pass the farm on ‘unburdened’ – with no borrowing against it – to the next generation.

In addition, the inter-generational transfer of the family farm can be a complex process with tax and revenue implications that may cause farmers instead to chose to ‘die in harness’.

Taking the long view and establishing a family ownership and occupation strategy is crucial to reaching the best outcome, as is seeking complementary advice from financial planning, legal and accountancy professionals.

In fact, as part of our involvement in the Scottish Association of Young Farmers’ Clubs Cultivating Futures agricultural and business training programme, the emphasis is on the importance of developing two, five and 10-year forward plans.

The cost of borrowing is relatively cheap and available, so drawing down funds could be a way to provide for those looking to retire.

In fact, with interest rates minimal, investing money in off-farm income generation such as buying commercial sheds and residential property; or in on-farm diversification such as wind power, farm shops, and holiday lets, can yield a good return to help fund retirement.

Restructuring options include splitting land ownership and occupation. Occupation of land and assets can be limited to a number of years, and assets do not have to be given outright. They can be transferred in stages as a gift or sale to family members.

On the tenancy side, the three-year tenants’ amnesty under the Agricultural Holding (Scotland) Act 2016 is being introduced in June. Landlords and tenants will be able to use this to have improvements, which have not previously been recorded, agreed and thereafter considered in the way going agreement at the end of the tenancy – potentially making way going from a secure tenancy more attractive financially.

The new Act also has a measure, not yet implemented, to enable retiring farmers to realise funds from their tenancy by negotiating their exit with the landlord, or if not taken up by the landlord, by offering it to the open market. Time will tell how this will operate, but it could provide a valuable exit route.

The key message is to think ahead; to play the long game; and seek specialist advice.

Succession plans, wills, pensions and investments should work together to achieve the right outcome, with the whole family involved in the decisionmaking process: successfully providing for retirement, or semi-retirement, with dignity.