What to consider in light of planned Budget IHT relief cut
© Adobe Stock The plan to limit inheritance tax (IHT) relief for farming and other businesses to the first £1m of value has been met with shock.
The £1m threshold, after which IHT will be due at 20%, is in addition to the IHT-free personal nil rate bands and residence reliefs which were already in place.
This gives a potential £1m a couple before any agricultural property relief (APR) or business property relief (BPR) is claimed.
Lobbying against the measure began almost immediately and while few see the decision being reversed, there is hope that the threshold may be raised.
In the meantime, farming families need to plan how to protect assets, and there are several options, say advisers. However, they also caution not to panic and that every case is different.
See also: Budget delivers heavy cut to farming’s inheritance tax reliefs
Capital gains tax
Rates of capital gains tax (CGT) for non-residential property are rising.
The current 10% for basic rate taxpayers and 20% for those subject to higher rate income tax will be aligned with the residential rates of 18% and 24% respectively, with immediate effect.
However, business asset disposal relief (BADR), essentially a form of retirement relief, remains in place.
BADR reduces the CGT rate on the disposal of qualifying business assets to 10% for a lifetime limit of £1m in gains.
This rate will rise to 14% from April 2025 and to 18% from April 2026.
Advisers caution that the rules for BADR are complex, so the timing and planning for a claim are important.
The rules differ depending on whether assets are owned personally or as partnership assets.
CGT rollover and gift holdover reliefs also survived the budget.
Gifting assets
One of these is to consider gifting assets during lifetime. Provided the person passing over the asset survives for seven years, the gift is tax free (see “Seven-year twist”).
The Budget also made no change to holdover relief, which allows assets in which there is a capital gain to be passed on, with the gain being held over until the recipient sells the asset.
However, the donor must not retain any benefit from the gift, so this complicates the position where the older generation still needs income from the farm and, in many cases, lives on the farm.
But with careful planning, accommodation assets can be split away from the core.
In making such a move, the income needs and potential care costs of the older generation need to be carefully considered, say advisers.
Seven-year twist
For many years, it has been possible to pass assets on during lifetime and, as long as the donor survives for a further seven years, the gift is free from inheritance tax (IHT).
If death does occur within the seven years following the gift, then different rates of IHT will be due:
- First three years Full IHT at 40%
- Years three to four 32%
- Years four to five 24%
- Years five to six 16%
- Years six to seven 8%
However, this taper relief applies only if the value of gifts made in the seven years prior to death is more than £325,000.
But where a gift was made on 30 October 2024 or is made after that date and the donor dies on or after 6 April 2026 and in any case before the seven years has run, the gift will be subject to the new limits for IHT reliefs.
Advisors say this is another reason to consider life assurance to cover any IHT liability.
Split ownership
Splitting ownership of the farm or business is another option, as each individual owner would have a £1m tax-free band.
Again, this would be subject to the seven-year rule and reservation of benefit issues need to be considered here too.
Advisers caution that this option can be complex.
Idina Glyn, partner at law firm Mishcon de Reya, says: “Fragmenting ownership is a possibility. The current changes incentivise fragmentation.
“Well-advised families might look at spreading assets but with ‘strings attached’, where each family member is bound by a set of rules and must take steps to protect the assets from third parties, such as by entering into pre- or post-nuptial agreements.”
The decision-making process for structures where parts of the business belong to individual owners in this way also needs careful thought.
It is also possible that anti-avoidance rules may be put in place to counter the tax-saving effect of such a move.
Inheritance tax – what’s changing?
From April 2026, the first £1m of combined business and agricultural assets will continue to attract no inheritance tax (IHT).
For assets valued above this limit, IHT will apply with 50% agricultural property relief, business property relief, or a combination of the two, at an effective rate of 20%.
Aside from this, the first £325,000 of any estate can be inherited tax-free, rising to £500,000 if the estate includes a residence passed to direct descendants, and £1m when a tax-free allowance is passed to a surviving spouse or civil partner.
IHT can be paid by instalments over 10 years, with HMRC currently charging 7.75% interest, due to rise to a level to be confirmed.
Pensions come into IHT net
Unused pension funds and death benefits payable from a pension will be brought into a person’s estate for IHT purposes from 6 April 2027.
This puts a 40% IHT charge on pension funds where the value of an estate exceeds the £1m threshold after other reliefs have been used.
Company structure
Forming a company rather than being a sole trader or a partnership may be the answer for some.
Different family members can be given different classes of share to reflect their involvement, interest or entitlement.
However, transferring assets into a company can trigger a tax charge, points out Robert Sullivan, a director of consultant and land agent GSC Grays.
It also brings different legal obligations than for sole traders and partnerships.
Life cover
The tax risk can also be reduced and, in some cases, removed, through the use of life assurance, insuring the life of the donor so that a policy pays out to cover the tax bill.
The cost of this will be challenging for some older people who may not be in full health but the sums need to be done, say advisers, who also encourage this type of protection for the younger generation.
Trusts
Trusts can protect assets, but will also be subject to the £1m allowance, which will have to be shared between related trusts set up from 30 October 2024.
The value of trusts is reassessed every 10 years for IHT purposes, with a maximum IHT rate of 6%.
Alex Doherty, head of private client tax at NFU Scotland’s tax helpline operator Johnston Carmichael, says those with farmland in trust at present should consider if there is an upcoming 10-year anniversary charge and whether there is merit in the trust continuing, or whether assets should be extracted prior to that charge.
What now – action points
Review wills
Most farming wills written prior to the Budget assume that there will be no inheritance tax (IHT) on the agricultural part of the estate and that diversified businesses will largely qualify for business property relief.
“All farming wills should now be reviewed, so that provision can be made for the inheritance tax that will be due,” says accountant Julie Butler, of Butler & Co.
Consider giving away agricultural and business assets before the measures are introduced in April 2026, to bank the £1m IHT-free sum available to each individual.
That will not be an option for everyone, says Sam Kirkham of accountant Albert Goodman, for example, where the current business owners are reliant on the income or where the succession plan is not ready to be implemented.
Life cover
Depending on age, health and affordability, life cover can provide cash to cope with the IHT bill.
It’s important to also think about protecting the lives of the younger generation in this way.
Gifts with reservation
Beware of giving away assets but continuing to benefit from them.
For example, giving away a farmhouse and continuing to live in it would bring the house back into your estate unless you pay a market rent for it.
Plan early
Create a plan for income outside the business to fund retirement.
Impacts and example farms
The Budget measures announced for farming expose many family farms to inheritance tax (IHT) for the first time since 1995, says Jeremy Moody, secretary and adviser to the Central Association of Agricultural Valuers.
“This potentially includes tenanted units on the value of the tenancy, an issue not seen in a generation, with possible liabilities in Scotland as well as in England and Wales.”
Where the value of all the farming assets add up to, say, £4m, there would be £600,000 of tax to pay, says Jeremy.
At accountant Albert Goodman, Sam Kirkham, partner and head of farms and estates gives the following example:
A 200ha farm, which would need to find additional profits of £60,000 a year after income tax and national insurance to fund the IHT bill over 10 years.
This is based on the value of the farmland only at £24,710/ha and assumes the farm is jointly owned by husband and wife, that nil rate bands have been used by other assets and ignores the value of working capital assets such as crops, stock and machinery.
“The measures will result in the need for costly and time-consuming valuations of stock, tillages, plant and machinery, and goodwill, which will all eat into the £1m allowance,” says Sam.
“It will require knowledgeable resource at HMRC to agree these complex valuations.
“The move clearly demonstrates a lack of understanding of the disparity between the capital value of land, where the policy behind the relief is to ensure property is not sold, and so that capital value is never expected to be realised, vis-a-vis the earning capacity of land.
“For those businesses who could afford this cost over 10 years, it is likely to impact their ability to invest in the business over that period and therefore is damaging to growth in the economy.”
Dr Jason Beedell, rural research director at Strutt & Parker, says that for a 140ha farm, the increase in IHT liability could be about £500,000 and that for a 400ha farm, the increase could be about £2m.