Business Clinic: Can I sell for a song to avoid inheritance tax?

Whether it’s a legal, tax, insurance, management or land issue, Farmers Weekly’s Business Clinic experts can help.

Here, Euan Fernie, a partner at accountant MHA, advises on the HMRC anti avoidance rules for selling assets to connected parties.

See also: Business Clinic – is farm a partnership asset or personal asset?

Q. I am very concerned about the inheritance tax (IHT) charges on farming families from April 2026.

Can I avoid this by selling my farming assets to my family, or anyone else who I wish to acquire them, for a small sum, perhaps even as little as £1? This would make it a sale and not an inheritance.  

A. Sadly, tax planning is never as simple and easy as it seems. HMRC looked at this particular idea long ago, and there is a raft of anti-avoidance legislation which deals with it.

Specifically, there are special rules for transactions with connected parties which effectively mean that any such transactions are deemed to take place at market value if they take place between “connected parties”, irrespective of the actual consideration given.

Connected parties include:

• The individual’s spouse or civil partner
• A relative of the individual
• The spouse or civil partner of a relative of the individual
• A relative of the individual’s spouse or civil partner
• The spouse or civil partner of a relative of the individual’s spouse or civil partner
• A company controlled by the donor alone, or together with his/her connected parties
• A trust set up by the donor or his/her connected parties.

There are also other pitfalls – if you retain any interest in the property after you have given it (such as occupying the farmhouse or land rent free), the transaction will be considered a “gift with reservation of benefit” (GWROB) and will be ineffective for IHT purposes until such time as the reservation is lifted, at which point the current value will be treated as a gift.

There is a particularly nasty trap here, because the GWROB rules do not apply for capital gains tax (CGT), so you could find that your donee has to pay IHT on the value at the date you die, but the CGT base cost will be fixed at the date of the transfer.

This means there may also be a CGT charge if they have to sell the asset to pay the IHT.

Great care is also needed if the asset is passed into a controlled company at undervalue. A controlled company is one where the shareholders are the same as or are closely associated with the donor(s).

To the extent that connected parties benefit from the transfer, there will be a “deemed disposal” for IHT purposes – so if you gifted an asset to a company jointly owned by you and your children, the consequential increase in the value of their shares would be a deemed chargeable transfer by yourself.

Such a disposal is not treated as potentially exempt and therefore if it exceeds the £325,000 nil rate band, a lifetime IHT charge will be payable immediately, even though the donor has not died.

Even if family members are not “relatives” as defined, there can still be a problem, as “relative” means a brother, sister, ancestor or lineal descendant.

The term does not cover all family relationships. In particular, it does not include nephews, nieces, uncles and aunts.

However, HMRC guidance to inspectors states that “where there has been a transaction between relatives who are not connected persons, say between an uncle and his nephew…you can still apply the market value rule if the transaction was otherwise than by way of a bargain at arm’s length”.

Finally, the rules also apply to CGT, so, for example, selling a let cottage to your son for a nominal amount might trigger a CGT charge even though no real money changes hands.

However, where the property is covered by agricultural or business property relief for IHT purposes, the gain here can normally be “held over” so it is only payable when the donee sells or transfers it otherwise, for example by gift.

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