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No Ordinary Field Day: The Future of Farms and Inheritance Tax

UK Farmland with muddy pathways and blue skies

With changes to crucial Inheritance Tax (IHT) reliefs due to come into effect next year, it has never been more important for landowners and business owners to take advice on their tax and succession planning.

The government has announced plans to cap the 100% rate of agricultural property relief (APR) and business property relief (BPR) at £1 million, combined, per person. For more details on how these proposed changes will work, see our previous article.

There have always been complicated issues that arise in ensuring that assets will qualify for APR or BPR.  However, having confirmed that the reliefs apply, it has often been unnecessary to think too much further about IHT planning. In many cases the most tax-efficient approach has been to hold onto assets until death.

Once APR and BPR are capped, there will be a lot more to think about. From what we know so far of the government’s plans, there are going to be traps for the unwary as well as opportunities to maximise the value of the reliefs. Those with land and business interests will need to make sure they take expert advice on their IHT planning.

Making the most of the allowances

Since the introduction of the Transferable Nil Rate Band in 2008, it has often been appropriate to leave the whole of one’s estate to one’s spouse or civil partner. However, the government’s announcement of the changes stated that “any unused allowance will not be transferable between spouses and civil partners”.

Assuming that this position is carried forward into the coming legislation, this marks a return to the ‘use it or lose it’ principles of pre-2008. Anyone with significant relievable assets will want to make sure that their Will is structured appropriately. This could mean gifts direct to the next generation, or in some cases trusts will be a useful way to achieve your goals in a tax-efficient way.

Lifetime gifts

The current rules mean that where assets qualify for full IHT relief, it usually makes sense to retain them until death, when they can pass without capital gains tax (CGT). Beneficiaries can inherit the assets with an uplift to their probate value. Since lifetime gifts of relievable assets typically do not save IHT, but either trigger an immediate CGT charge, or else result in the beneficiary taking on a held-over gain, they rarely make sense from a tax perspective.

If the government’s proposals go ahead and APR and BPR are no longer available in full, that will shift the equation. Thought should be given to whether the possible IHT saving of a lifetime gift will justify the CGT consequences.

However, there are other factors to take into account, including whether you can afford to gift assets, bearing in mind that retaining any use of gifted property, or the income it generates, can result in a reservation of benefit and so prevent any IHT savings. If you’re passing on your business or a rental asset, you need to consider whether you have other sources of income to fund your retirement.

Use of Trusts

While trusts may not in reality be the easy IHT saving trick they are often portrayed as, they still have an important role in IHT planning.

For one thing, trusts can help boost how much can be passed on tax free. As well as their own nil rate band, trusts will now also have their own £1 million allowance for 100% APR/BPR (albeit one that will be shared with other trusts created by the same settlor(s) since 30 October 2024). This means that, if set up correctly, a trust will be able to hold up to £1,650,000 without incurring an IHT liability.

Aside from this, trust IHT is still easier to plan for than IHT on death. Under the new rules, the charge will arise on a known date every 10 years at a rate of up to 6% (and in effect up to 3% for APR/BPR property, under the new rules), rather than at a rate of up to 40% whenever the owner dies. Trustees can plan the trust’s and the underlying business’ finances to ensure that the funds necessary to pay the tax will be available at the appropriate date. Importantly, in most cases, the gain on assets settled onto trust should also benefit from hold-over relief. This will have the effect of deferring the realisation of the gain and, ultimately, aiding with the liquidity position for the business.

Conditional Exemption for Heritage Property

A Conditional Exemption (CE) from IHT is provided for certain assets, including:

  • Buildings of outstanding historical or architectural interest;
  • Land of outstanding scenic, historic or scientific interest; and
  • Objects or collections of pre-eminent national, scientific, historic or artistic interest

Where assets are assessed to qualify for CE, the exemption will only be granted on the basis of an undertaking given by the beneficiary to HMRC to preserve the asset and to make it available for public access. When CE has been granted, it is also possible to claim CE on a trust fund set aside for the maintenance of the property.

Where it has been possible to obtain 100% APR or BPR on an estate, there has been no need to consider conditional exemption. However, with larger estates no longer able to qualify for 100% relief, CE will likely become more attractive in many cases.

Helping you find the right solution

If the government’s proposed changes go ahead in their current form, planning is going to become even more complex. Expert advice has never been more necessary. After all, when it comes to tax and succession, a failure to plan is a plan to fail.

Quastels’ Private Wealth and Tax team is able to provide specialist advice on these topics and more. The team has been joined this year by Jack Burroughs TEP, Senior Associate, who was previously the Private Client and Tax Adviser at the CLA (the Country Land and Business Association) where he assisted some of the country’s largest estates with their tax and succession planning. The team are able to provide land and business owners with expert advice, tailored to their particular circumstances and the commercial realities of their business.

To discuss your requirements and find out how we can help you, please get in touch.

Jack Burroughs

Senior Associate

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