The Farming Financial Planning Guide 2019
10th June 2019
Stuart Coombe See profile
The building blocks of financial planning are similar across many sectors, but for rural businesses it’s often a complex activity which is subject to unique considerations and nuances. However, while financial planning in these circumstances faces specific challenges, there are steps that farming businesses and their advisors can take to make the most of the opportunities available.
Every business will have its ups and downs, but the wildly varying income seen in the farming sector makes longer-term planning difficult. Most businesses can estimate the value of their output, but farming is unique in lacking control over this, and certainty is a rare thing in rural circles.
Cashflow can get very stretched and the ability to store wealth ‘off-farm’ can be sporadic, so it’s important to try and instil discipline in the good years, and – as far as possible – set clear boundaries between personal and business funds. Personal funds are frequently lent to farming businesses, often without any likelihood of being paid back. This can cause issues further down the line when older generations try to extract the capital they need to fund expenses such as retirement or care fees.
Most farmers are self-employed, so relying on an employer to set up a pension is not an option. Wages can also be low, especially where families are involved or other benefits such as housing make up part of the remuneration, making it very difficult to save. It is also common to hear farms described as ‘money pits’ or ‘black holes’, such is their ability to draw all available capital into them. Therefore, trying to prise funds away (at the earliest stage possible) to invest for the longer-term is crucial.
Rural businesses represent a huge financial and emotional commitment. Working overdrafts often run well into six figures, and borrowing at what could be considered eye-watering levels is common. Protecting against these borrowings is crucial, to sustain the business in all eventualities; however, working in the countryside and undertaking manual farm duties is more risky than most careers, and protection premiums will reflect this.
The most commonly recurring planning themes are in connection with retirement and succession. Unlike salaried employees who have a set retirement date in mind, farmers usually stay working for longer, and with no clear line between work and retirement.
We find that many farmers don’t often know when they would like to retire, whether they will still retain an interest in their businesses, and what they will require by way of income, as this will vary depending on whether they stay in the farm business or retire away from the farm. While they remain part of the business, some of their costs may be borne by the business; if they retire away from the farm this can lead to a spike in outgoings and a need for additional income.
However, farmers are often very entrepreneurial and keen to explore areas that would not always be of interest or appropriate to others. More complex pension structures, and considering suitability of land or commercial buildings within a self-invested personal pension (SIPP) or small self-administered scheme (SSAS) wrapper, can be useful strategies for the right families.
Succession planning also provides its own challenges for farming enterprises. Although rules regarding the availability of agricultural and business property relief have tightened significantly, with the right tax advice rural businesses can still maximise the Inheritance Tax (IHT) reliefs available. But if there are no successors and the farming business decides to sell up, or if the land or assets do not qualify for these reliefs, IHT can become a huge issue. With average farmland prices at around £9,000 an acre, even modest-sized farms can be worth substantive sums that the current nil rate bands will not come close to covering. Often the residence nil rate band can be in jeopardy as the value of an estate (before reliefs) can creep over £2 million. In such cases, getting expert advice as early as possible can be the key to mitigating the IHT burden.
Equalising legacies where one child will inherit a farm with very high capital value is also a particular situation where use of gifting, whole of life plans or other strategies may need to be considered.
We work in conjunction with other professionals to provide you with a joined-up approach to tax and financial planning. Our role as a financial planner is to assess the situation once you have a clear picture, and to advise you on any remedial action.
If you would like expert advice from one of our specialist rural financial planners, do get in contact.
"Financial planning for rural businesses is often complex and subject to unique considerations."