Future-Proofing Farming – Inheritance Tax Insight & Planning Tips

Following the recent backlash from many UK farmers against the changes announced by the new Government on inheritance tax, we discuss below what this will mean and some key considerations to help prepare for and mitigate the impact.

As many will only be too aware, there were significant changes in the recent Autumn Budget that will impact all business owners and in particular farmers. While the initial headline announcements will be worrying, with careful planning and consideration of your individual situation, many of the consequences can be mitigated.

Assessing the situation

The new rules outlined by the Government restrict the value of agricultural property that can be passed on free from inheritance tax to £1m per person. With only this amount to potentially cover land, buildings, and machinery this could bring many farms within the scope of inheritance tax. Although at a reduced rate of 20%, having to find the funds to pay this bill for many could put the future of the business and the ability to continue to produce food for the nation at risk.

Unlike the standard inheritance tax allowance, the £1m allowance for agricultural relief is not transferable, meaning that only the last surviving spouse can pass on £1m whereas, each spouse could individually pass on £1m each. By ensuring your Wills are worded correctly you can pass on £1m on each death and effectively double the value of the farm that can be passed on free from inheritance tax.

As well as the £1m of agricultural relief, the standard inheritance tax nil rate band of £325,000 per person and residence nil rate band of £175,000 is available if passing your home on to your direct descendants. These allowances are transferrable so they could result in a further £1m being passed on free from inheritance tax.

The residence nil rate band can be lost as it is tapered down for estates exceeding £2m so again, it is important to consider your particular situation and structure your affairs to protect this allowance if possible.

Gifting assets

If you gift assets more than seven years prior to death, these will not be subject to inheritance tax so by planning in advance it would be possible to pass on all or part of the farm earlier and avoid any inheritance tax bill. However capital gains tax may be applicable on the transfer, so it is a good idea to take advice on your particular situation to make sure solving one problem doesn’t create another.

While gifting assets may sound like a simple solution it is a big decision with potentially serious consequences. The assets would be legally passed to the next generation and could be the subject of future events such as divorce or bankruptcy, so putting in appropriate legal protections such as pre or post-nuptial agreements should be considered.

Paying the bill

Although not solving the problem, the facility to pay any inheritance tax bill in installments over 10 years should be available, which may in some circumstances ease the situation and possibly allow farms to keep functioning and providing food for the country.

Another option worth considering might be insuring against the inheritance tax bill. A ‘whole of life’ insurance policy can be taken out where in exchange for monthly premiums for the rest of your life a capital sum can be paid on death, which your family can use to pay an inheritance tax bill and avoid the need to sell assets. Whether this might be right for you requires careful consideration of your financial and medical situation but it can be a great help for people in the right circumstances.

The changes may accelerate the trend towards incorporating farming business, which as well as offering opportunities to plan the passing of a farm between generations can also result in lower rates of tax on profits and flexibility on how income is taken.

Final thoughts

Although at first sight the Government changes may seem daunting, hopefully for many, there will be sensible steps that can be taken to at least lessen the impact. The key is to understand your own individual situation and objectives, and the options available to you. Then, if necessary, take advice from a variety of professionals across financial planning, tax, and estate planning to ensure a coherent plan is put in place to structure your affairs in the best way for the future of your family and farm.