Generational Transfer Finance

Everything you need to know about generational transfers from the ground up, helping you understand agricultural finance.

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Farming is very often a family business, and farms will sometimes stay within a family’s hands for many generations. The long-term investments that make a farm profitable and the deep attachment many farmers feel to their land make agriculture a multi-generational enterprise that must be passed down with care through the years. However, it’s not as simple as it once was to ensure that a farmer’s descendants inherit their land and assets in full; inheritance taxes and death duties make it difficult to preserve an entire estate upon generational transfer. The need to pay out sums of capital whenever the deeds to the land change hands makes it hard to keep a farm within the family, but there are ways for farmers to ensure that their descendants still receive the most part of their wealth.

 It’s important to appreciate the role that bridging finance can play in assisting generational transfers. While access to flexible funding doesn’t in itself limit the amount of duties the estate must pay, it is possible to use a short-term loan to gain a little financial breathing space. By restructuring and refinancing cleverly, executors can minimise the impact which generational transfers have on the estate, and ensure that assets are kept intact as much as possible.

While bridging finance may be used to help retain a family’s overall assets, it’s important to bear in mind that any form of finance will cost money to obtain. Whilst bridging loans present a powerful option for restructuring a farm’s financial position, they will also cost money, and as a secured form of finance, the lender will be able to repossess the property if the loan is not repaid. It’s crucial that anyone considering bridging finance seeks the advice of a qualified financial advisor before committing to this course of action.

Retaining Wealth in a Generational Transfer

Passing wealth down from one generation to another can happen in several ways. The most common is for the farm’s existing owner to retire and sell the farm on to their children. In itself, this is straightforward, but few farmers will want to charge their children full whack for the price of the farm; by using a more flexible lending solution it’s possible to sell the farm at less than its market value, which enables farmers to pass on their wealth more easily.

When selling a farm under-value, it’s important to bear in mind that the farm will eventually be refinanced with a mortgage provider. While this is a sound long-term strategy, many mortgage providers will not grant loans on property which has changed hands in the past 6 months. This so-called “6 month rule” holds true throughout the mainstream lending sector, which can mean that borrowers will need to maintain a bridging loan for a significant period of time. It’s vital to have a strong exit strategy in place that guarantees the loan will be repaid.

The other way for wealth to be transferred between generations is through a will. When apportioning an estate, executors will need to account for the payment of inheritance tax on the estate’s value. While there is substantial protection for the preservation of wealth, especially when a house is passed down through the family, a farm is still likely to be liable for inheritance taxes. This can put pressure on the executors to liquidate the estate quickly and can result in the breaking-up of the family farm.

When a farm is passed down as part of a will, the total inheritance tax that it may be liable for can change. The threshold for inheritance tax is £325,000, but if the family house is being passed down as well this rises to £425,000; anything above this value is taxed at 40%. This means that a farm with a value of half a million pounds would be presented with a tax bill of £30,000 upon the owner’s death (40% of £75,000). Because the value of a farm is typically tied up in land and equipment, meeting this bill requires the sale of some of the farm’s assets. However, there is a 6 month time limit on the payment of inheritance tax, which executors must be sure to meet.

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Bridging Loans for Generational Transfers

When parts of a farm must be sold to satisfy an inheritance tax bill, it can be tempting to liquidate the property as quickly as possible. Anyone who’s been through a real estate sale knows how deals can fall through at any time, and there’s no guarantee that a sale will be completed within six months. Furthermore, if buyers know that the seller has a 6 month time limit in which to complete the sale, they may well try and force a bargain price, since the seller must complete the sale at any cost.

It is possible to evade this, however, through the use of bridging finance. Short-term secured loans are an ideal method of bridging the gap when a debt comes due, and give executors the option of paying off debts immediately without rushing the sale of assets. Bridging finance can be used in almost any situation, and is well-suited to meeting the demands of generational transfers; loans of any size can be taken out against the estate’s value, and typical loan terms extend up to 12 months - more than enough time to complete the will.

Retaining Wealth from Generation to Generation

Making sure that their hard-earned wealth doesn’t disappear when they retire is a top priority for many UK farmers, and it can be hard to understand precisely how best to achieve this. The many demands which are made whenever a farm changes hands make it difficult to keep intact, and it’s all too easy to find a farm’s wealth being whittled away. However, by using a fast and flexible form of finance like bridging loans, farmers stand to pass on a legacy they can be proud of, and keep their farm within the family.

Frequently Asked Questions

What is a bridging loan?

A bridging loan is a short-term loan secured against property. It allows you or your business to “bridge a gap” until either longer-term finance can be arranged, or the underlying security or other assets can be sold.

How can businesses use a commercial bridging loan?

There are many ways in which businesses can use a commercial bridging loan. Common uses are to cover short-term cashflow issues or to finance tax liabilities. More positively they can be used as working capital and by new businesses as a cashflow injection to acquire additional stock or even to acquire new equipment or premises for the business. Beyond these examples there are a huge variety of ways in which commercial bridging loans can be used.

Can commercial bridging loans be obtained on both a 1st and 2nd charge basis?

Yes. Whilst not as widely available as 1st Charges some lenders will happily write 2nd charge commercial bridging loans.  

Can commercial bridging loans be used by limited and offshore companies?

Yes they can. They can be used by a huge variety of companies and by foreign nationals who can struggle to get High Street Finance.

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