Business Clinic: Succession options to consider post-Budget

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

Here Karen Perugini, a partner in Thrings’ succession and tax team, advises on the options for elderly farming parents, given the threat from the Budget inheritance tax (IHT) move.

See also: Business clinic: Neither my father nor his brother has a will

Q. I farm in partnership with my parents on about 590ha of land. The farm is owned with an AMC mortgage on an 81ha block bought about four or five years ago.

The succession of the farm has been sorted by my parents in their will and the farm is going to be left to me.

The concern I have is that my parents are both in their late 80s and the land is still in their name. This situation was ok until the recent Budget and now I am wondering what to do next. Unfortunately, we may be too late to go down the gifting route or is it still worth doing? Are there other options? My son is studying agriculture and business at the Royal Agricultural University, so the long-term interest in farming is there. I would be grateful for any advice to seek the best way forward.

A. The starting point will be to look at the current ownership structure – who owns what?

While you farm in partnership, if the land is actually owned by your parents as you’ve indicated, there’s no concern about transferring the farm between them.

We often see farming businesses structured in this way, where the land is owned outside the partnership.

While it’s a common structure, it does mean you need to carefully consider the succession of the farm and what the partnership owns.

Does it own everything else or has any capital from the partnership bought any land over the years as this would make some of the land a partnership asset?

Having a carefully drafted partnership agreement is always highly recommended as this clearly sets out who owns what.

Establish values

Assuming the land is owned jointly by your parents, the next step would be ascertaining values for the farm and other assets to help build a picture of what the current IHT exposure would be if they did nothing.

This would then help suggest how they could mitigate their exposure by looking at the current allowances and reliefs.

Assuming your parents haven’t made any significant gifts in the past seven years, they will each have their own nil-rate band.

Rates are currently frozen until 2030, which means the first £325,000 value of their estate will be taxed at 0%.

There is also an additional £175,000 residence nil-rate band allowance which can be claimed in certain circumstances.

Both allowances are transferable between spouses, effectively on the second death they can have allowances in the sum of up to £1m.

The well-publicised changes to agricultural and business property reliefs (APR and BPR) announced by the government in October’s Budget has confirmed the first £1m of qualifying assets will be subject to 100% relief, with estates exceeding that qualifying for 50% relief.

Effectively IHT will apply at 20% on the value of qualifying assets over £1m.

Unlike the nil-rate bands and residence nil-rate bands, this allowance is not transferable between spouses so it’s important that your parents revisit their wills to ensure they are structured so they can both utilise the allowance.

It is also worth noting that, where IHT is due, it can be paid over 10 years interest-free.

Mitigation measures

After the applicable allowances and reliefs have been considered fully, your parents may want to look at how to mitigate their potential IHT exposure, with lifetime gifting being an obvious choice.

Hold-over relief would apply to any lifetime transfers of assets which qualify for APR, so there would be no immediate capital gains tax liability on this type of gift.

For IHT purposes, the value of a lifetime gift will fall out of the calculation if the donor survives seven years from the date of making the gift.

However, taper relief on the amount of tax to pay on a lifetime gift starts to reduce the liability after three years.

Therefore, lifetime giving may still be an option, rather than taking no action at all, as the final tax bill would be less even if the donor doesn’t survive the full seven years from the date of making the gift.

If the ultimate intention is to include the next generation in the business then it may be appropriate to act sooner rather than later in order to potentially avoid larger tax bills that would otherwise apply in the future.

One final point to consider is that AMC will need to be notified of any changes to ownership and they may want to negotiate terms.

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