Succession planning

For many years, the conventional capital tax planning advice for many farmers was to retain ownership of the farm until death.

In last Spring’s Addition (before the General Election), we suggested that political uncertainties meant that some families (where there was no real prospect of the farm ever being sold) should perhaps consider gifting an ownership share to the next generation.

October 2024 Budget

The October 2024 Budget reinforces and expands that.  With 100% agricultural property relief (APR) and 100% business property relief (BPR) set to be limited to a £1m ‘allowance’ per person from April 2026, many family farms are destined to incur some inheritance tax (IHT) on a death, for the first time since the 100% reliefs were introduced in 1992.  Many families’ IHT exposures will be further aggravated by the proposal to count pension wealth into IHT from April 2027.

There is an expectation that a different future government may reverse these changes, but it should be noted that Mrs Thatcher came to power in 1979, while the 100% rate for APR and BPR was only introduced in 1992 – up to then, the relief rates were 30% or 50%. 

Farmers should assume that, if the new £1m allowance is actually implemented, it may remain in place for many years.

Capital tax planning

Fortunately, the October 2024 Budget did not restrict lifetime planning opportunities by changing the rules for holdover relief or by extending the minimum 7 years which must elapse between a gift and death, if the gift is to be capable of falling outside the estate.

There is a difficult balance between a family’s desire to avoid future IHT (perhaps at 20%, with a facility to spread the payment over 10 years – so 2% per annum, starting from a future date) and concern that ownership at too young an age may risk divorce or financial misfortune that could cost much more, earlier.  That balance needs very careful thought.

Nevertheless, the October 2024 Budget pushes the balance more in the direction of lifetime gifts; possibly as a series, starting modestly and building up over perhaps 15 or 20 years as the older generation gain confidence.  Sons and daughters might join family farming partnerships younger than previously, but with small capital interests initially.

It is essential to recognise that, for a gift to be effective for IHT, the donor must not benefit afterward from what they give away.  Rent adjustments or appropriate profit sharing in a partnership may be necessary following a gift.

Non-transferable allowance

The £1m ‘allowance’ is to be non-transferable.  This means that, if the allowance is not used on the first death in a marriage or civil partnership (eg because that spouse either did not own farm property or Willed it to their spouse); it will not be available as a second £1m on the second death.  This has two implications for couples:

• Where the farm (plus any other assets qualifying for 100% APR or BPR) is worth more than £1m, both spouses should own some of it; and,

• Couples should try to avoid leave qualifying assets to each other in their Wills.  Mirror Wills have been commonplace and many farmers will therefore need to update their Wills.

Capital gains tax

Gifts are disposals for capital gains tax (CGT) and gifts to individuals other than spouses will often result in a CGT liability unless holdover relief is available.  Holdover relief tends to be available for gifts of farm property, but it is not always – so the CGT position must be checked before acting.

CGT rates (where payable) have been increased – the lower and higher rates are now 18% and 24% for all assets, and the business asset disposal relief (BADR) rate is 14% for 2025/26 (increasing to 18% from 6 April 2026).

Conclusion

There is still a hope that the October 2024 Budget changes for IHT may be altered before they come into force in April 2026 and 2027.  Farmers and farming organisations have demonstrated strong opposition to the changes due to be introduced in future (not current) legislation.

However, there has been little sign so far of concession and we would advise all farming families to consider the implications for them, and whether (or not) they should modify their succession plan.

We would be glad to discuss your circumstances.