By Linda Tinson,

partner Ledingham Chalmers

From significant claims that threaten the very existence of a farm business, to an irretrievable breakdown in even the closest of relationships, the consequences of lack of effective succession planning can prove devastating.

That’s why it’s so important for family members to seek separate legal advice to protect their interests as well as the future viability of a farm business.

Family example:

Here’s an example. In this case, the family comprises mum, dad, a farming daughter of 32 and a non-farming son of 30. The farming partnership includes the mother and father – in their 60s – and the daughter.

The family had the chance to buy the farm they’re tenants in, and made the general assumption the partners, as trustees, would purchase the farm.

The family was told they could take separate legal advice and we were called in to discuss wills for the daughter, which led to a wider investigation of the purchase proposal. It soon become obvious that the purchase was more complex than it initially seemed.

The family intended that the daughter would inherit the farm business and land. The farm was profitable in its own right, but if broken up between family members, wouldn’t be viable.

There wasn’t much more than the farm to pass on to the children. The son and daughter had previously understood this, bearing in mind a tenanted farm couldn’t be split between them and the non-farming child had no interest in the operation.

Best intentions

With the purchase, though, the situation had changed. When it was bought, there would be considerable debt but there would also be a much more valuable asset.

If the purchase was to proceed in the name of the partnership and/or the farm land was deemed to be an asset of the partnership, then the net value of that asset would be deemed a 'moveable asset' for succession purposes. As such, if one or other parent were to die, then there would be a potential 'legal rights' claim.

If the deceased’s share in the partnership assets equated to £1.5m, the possible legal rights claim by the disinherited child – in this case the son – would be £250,000 (and the surviving spouse £500,000, if claimed). Hefty sums for any business of this kind to bear.

Alternatively, if the farm was bought in sole, or joint names with a robust plan in place to support the intended succession scenario, the farm would not be deemed 'moveable' and no legal rights could be claimed.

We often deal with family businesses in land transactions and succession planning is a key part of the advice which those businesses require to ensure that there are no unintended consequences in the future. That advice often includes consideration of pre and post-nuptial agreements, partnership arrangements and family joint ventures.

One principle that underpins all this is the importance of everyone seeking separate advice. As you’d expect, the Law Society of Scotland has clear requirements around the issue of conflict of interest.

The challenge can be that clients don’t realise, or are on many occasions fearful of taking up the offer of separate legal advice, as they feel it may upset the apple-cart or cause offence. That’s where open and honest communication comes in.

Assignation of tenancies in life

A different approach to succession is needed when it comes to owner-occupied versus tenanted farms, so it’s clear there’s no one-size-fits-all answer.

Here, we look at one specific aspect – the benefits of assigning the tenancy in a tenant’s lifetime, in line with Scotland’s tenant farming commissioner, Bob McIntosh’s, recently published succession guide.

The benefits of successful assignation in life are —

• Knowing matters have been settled and having peace of mind that the tenancy has safely transferred to the next generation;

• Maximising tenancy value in the event of a landlord approach to acquire it in whole or part, specifically ensuring the tenancy won’t naturally reach its demise when the older family member dies.

In the first instance, it’s important to know what sort of tenancy you have and what rights and prohibitions are in the lease, if there is a written lease.

The best approach is to involve a specialist agricultural solicitor to report on the lease and the tenant’s position, and then to have open and frank discussions with the family on what happens next.

If the tenancy is given to one particular family member, there can be concern amongst other family members they might lose out on money in the future. In this case, it makes sense to put in place provisions prior to the assignation to remove this barrier by ensuring that – if there is any increase in tenancy value – that a clawback on this uplift is paid to family members who aren’t tenants when it’s given up, either in whole or in part.

What it boils down to is this: Take professional advice and open, and honest communication with everyone involved, is crucial part for getting the right arrangements in place that protect everyone’s interests and make a success of succession.