The biggest threat to the family farm is the family itself
It’s an oft-repeated, and regularly publicised, solicitors’ mantra for clients to get their affairs in order.
Yet there is one complex, sensitive and deeply personal area where the implications of getting it wrong are particularly dire: succession planning in family farming businesses.
From significant financial claims that threaten the very existence of the business, to an irretrievable breakdown in even the closest of relationships, the consequences of lack of effective succession planning can prove devastating following the death of a family member.
The considerable value of these businesses, and the resultant temptation for family members to ensure they receive their perceived – or assumed – share of that worth, means that all too often we see even very close family relationships deteriorate following disagreements about the deceased’s wishes, especially where there is no formal agreement in place.
Even if clients have a properly drafted and up-to-date partnership agreement or will, opportunities exist for family members to make a claim for legal rights where the farm is held by the business, meaning the farm assets are deemed moveable estate.
It is usually not enough to simply customise a standard will: the legal complexities of the Scottish system mean it is extremely important that the background of the business set-up is thoroughly investigated, so the party’s intention is accurately documented at the time of drafting.
At a recent Scottish Association of Young Farmers’ Cultivating Leaders event on this subject, we presented various scenarios: putting the importance of effective planning in context.
Scheme of division
In the first instance, we considered the case of a married couple with two children; the father owning the farm and house, worth around £2,000,000.
Here, the father died without a will and no agreement could be reached as to what to do with the estate. In this scenario a “scheme of division” in terms of the Succession (Scotland) Act 1964 would apply.
It is generally – and incorrectly – assumed in such situations that the spouse would inherit the whole estate.
Following this model, and making some general assumptions, the spouse would only inherit around a quarter of the value of the estate, with the two children splitting the balance of the value between them.
Farm assets as moveable estate
In a quirk of Scots Law, if a farm is held in the partnership or in a Limited Company, the farm assets are deemed moveable estate.
As such, the children could, in terms of the Succession (Scotland) Act 1964, make a claim for “legal rights.”
Here, the farm is held in the name of the farming partnership comprising the husband and one son held in 80:20 ratio: the wife and other child not being partners.
In this scenario the father had a valid will leaving everything to his wife: the children being effectively disinherited.
Regardless of the details of the will, a crude calculation in this scenario shows the children would collectively be entitled to payment of one-third of the father’s 80% share in the partnership assets, roughly equating to £533,333.
This potential claim could be circumvented with planning; had the farm been retained outwith the partnership it would remain heritable property and, as the law currently stands, the farm would not be subject to a legal rights claim. The family farm could instead be passed on to those for whom it was intended, and the future of the business protected.
The other family members could be provided for separately and unintended consequences avoided.
Whilst we can never legislate for a family’s reaction to the passing of a family member, protections can be put in place to avoid tools becoming weapons, and the family itself proving to be the biggest threat to the family farm.
Linda Tinson is a director of rural business at Ledingham Chalmers, based in the firm’s Stirling office.
An earlier version of this article appeared in the Dundee Courier on 31 January 2017.