In this article, Julia Banwell, director and chartered financial planner at rural accountant, Old Mill, in the UK, discusses providing for non-farming children.
Passing assets on to non-farming children may seem complicated. However, there are options to do so while keeping the farm intact.
For any farming family with more than one child, there will be a point at which you will raise the topic of inheritance and how you will divide assets, particularly if not all the children are involved in the farming business.
On the whole, most will want to keep the farm as intact as possible. So, how can parents provide for their non-farming offspring?
Splitting the inheritance fairly does not necessarily mean equally.
Fair is your own assessment of what you believe is right. So when you are considering how to divide assets between the children, the most important thing is that you are comfortable with the split, whether that is equal or not.
What to consider when assessing assets
Family farmers often have farm cottages, pensions, savings or buy-to-let properties. You can use these to provide a lump sum to non-farming children.
Though cottages often remain with the farm, they could be left to non-farming children with the Will containing a set option or covenant for the farming child to have first refusal to purchase them if and when sold.
If property assets are off-farm, like buy-to-lets, this is less likely to be a necessity.
There is also an option to nominate pensions upon death to the non-farming children. Savings and cash funds could be similarly used.
However, it is important to work through the cost of inheritance tax to understand exactly what will be left for them after the tax bill has been met.
To divide the farm or not?
Where there are no off-farm assets, there is the option to divide the farm – though this is rarely the preferred choice.
In this situation, the main farm area could be left to the farming child, with outlying land allocated to the other children. Again, perhaps with an option to purchase stated in the Will for the farming child.
Alternatively, the entire farm could be left to all the descendants, with some or all of it in trust. This means that if land is sold, the proceeds will be split between all of them.
Where some of the farmland has development potential, it may be sensible to treat it differently from the rest of the farm.
The potential development land could be left in trust to all of the children, with a provision that it can be let to the farming child while it remains undeveloped.
Or it could be left to the non-farming children only, with an expression that there should be the option for the farming child to rent it before development.”
And transferring this type of land to a trust before death could lock in Agricultural Property Relief or Business Property Relief as they are set at present.
Whole of Life insurance policy
Another option is to put in place a Whole of Life insurance policy.
This is a policy that pays out a lump sum upon death – providing you pay premiums throughout your lifetime.
Though it involves paying a premium every month, it can be far more cost-effective than the farming child needing to borrow money to pay off their siblings.
Example: a male (65) and a female (62), both non-smokers, want a £1m pay-out with a fixed premium.
This would cost £1,663/month for the rest of their lives – or just under £20,000/year.
It would take more than 50 years for them to have paid into the policy the amount to be received.
In comparison, if the farming child has to take out a £1m loan upon death to buy out their siblings at an interest rate of 3.5% over 25 years, this would cost them £5,006/month; just over £60,000/year.
Borrowing funds after death means that they would need to repay both the original borrowed sum of £1m, plus interest – taking the total cost of actioning this post-death to around £1.5m.
Like most things, it is significantly less expensive if it is possible to plan for this in advance.
There are many aspects and options to consider before drawing conclusions.
It is sensible to involve all parties to help you reach the most equitable solution for your own family, providing significant peace of mind in later years.
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