KNOWLEDGE

Top tips for Trusted Advisers

Morton Fraser Partner Lucia Clark
Author
Lucia Clark
Partner
PUBLISHED:
19 February 2021
Audience:
category:
Blog

In this blog, I want to set out some of our tips for trusted advisers such as accountants and financial advisers who are dealing with farming families - all from a family law practitioner's perspective.

Firstly, have the long term consequences of the decision been considered?

In our experience, farmers are often given advice in order to reduce their tax liability, without detailed consideration being given to the impact those decisions will have in a family law context. 

In Scotland, the starting point for financial provision on divorce is fair sharing of "matrimonial property".  Matrimonial property is all the property belonging to the parties at the date of separation which has been acquired during the marriage, but excluding gifts or inheritances. 

Farmers will often be advised to bring their spouse in as a partner, transfer assets to a spouse or to form a new partnership - all of which can have beneficial tax consequences, and so might save money in the short-term.  But by doing any of these things, the farmer may be inadvertently converting previously ring-fenced non-matrimonial property (which would not have entered the pot for sharing on divorce) into matrimonial property (which will enter the pot to be shared on divorce). 

TOP TIPS - one way for a farmer to protect their business whilst still re-structuring in a tax efficient manner is to enter into a pre or post nuptial agreement.  These agreements can be used to protect and ring fence pre-marital, inherited or gifted assets in the event of divorce - even if they are converted into matrimonial property during the marriage.

Secondly, have the difficult questions around relationship status been considered?

Again, in our experience, significant restructuring of farm assets has sometimes happened at a time when (as has later become clear) the marriage was teetering on the edge.  Whilst asking these questions can be difficult, it can avoid an even more difficult conversation down the line. 

If a farmer decides to relinquish control of the business and become an equal partner with their spouse, consideration should also be given to the practicalities of a husband and wife running a farming partnership together and what protection there will be in the event of a breakdown of the relationship. 

TOP TIPS - it can be very helpful to have a written Partnership Agreement which clearly sets out the limit that a spouse can draw from the business by way of cash or capital or their ability to dissolve the partnership.  The Partnership Agreement can also be drafted to clearly set out the decision-making process, and whether one person has greater control.  Similarly, if the farming business operates as a limited company, the spouse could be given a different class of shares with different voting rights to that of the farmer. 

Thirdly, gifting outright

Many advisers will be involved in the logistics of passing the farm onto the next generation. This will often involve parents transferring the farm land into their adult child's name.   Farm land which a farmer spouse receives by way of gift from his/her parents during the marriage is not matrimonial property and will remain ring-fenced if the farmer spouse continues to hold it in their sole name.    Accordingly, it is crucial that gifts are given outright and that no consideration is paid directly or indirectly to the parents.  Otherwise it will be open to the other spouse to argue that the farm land was acquired for value rather than gifted and that it therefore constitutes matrimonial property.

TOP TIPS - ensuring that the disposition transferring farm land is for "love favour and affection" rather than for consideration and that the LBTT submission receipt on the disposition also records that the transfer is a gift will avoid ambiguity.  Think twice about creating a loan account as a tax efficient way of income being paid to the parents following transfer of the farm land - it could be argued this is consideration for the land.  It is also important to ensure that consideration is not paid in another less obvious way such as land swap, by having an arrangement whereby the parents remain living in the property they have gifted rent free or the parents are paid a monthly "pension" from the business.  If the spouse can prove the farmer has paid consideration for the land, it will not have been gifted and the land could be held to be matrimonial property and in the pot for sharing. 

Disclaimer

The content of this webpage is for information only and is not intended to be construed as legal advice and should not be treated as a substitute for specific advice. Morton Fraser LLP accepts no responsibility for the content of any third party website to which this webpage refers.  Morton Fraser LLP is authorised and regulated by the Financial Conduct Authority.