Succession planning for farmers

The Chancellor, Rachel Reeves, announced various changes to legislation in her Autumn Budget in late October 2024, including changes to estate planning. As a result, it has become important now more than ever to plan appropriately for the next generation, especially for those looking to pass down family businesses including family-run farms.

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How Does Inheritance Tax Work?

Inheritance Tax (IHT) is a tax payable on the estate of an individual following their death. There is an IHT nil-rate band (NRB) which is the value of assets that can be passed on without incurring any IHT charge which is currently frozen at £325,000 per person until 2030.

There is also a residence nil-rate band (RNRB) which is an additional IHT allowance of £175,000 per person when property that an individual owned and lived in as their main residence at some point is passed on to their direct descendants (children or grandchildren). Therefore, each individual currently has a maximum IHT allowance of £500,000.

Spouses and civil partners are able to inherit assets on the death of their spouse/civil partner free of IHT, however, those assets would form part of the surviving spouse’s estate. They can also inherit their NRB and RNRB and combine them with their own to provide them with maximum combined IHT allowances of £1m on second death.

If an individual has an estate worth over these allowances on their death, the executors are liable to pay IHT at the rate of 40%.

What is Agricultural Relief?

Agricultural relief is an IHT relief for individuals wishing to pass on their agricultural property to the next generation. Agricultural property includes agricultural land, crops and farm buildings but not animals or equipment. The relief is given on the agricultural value of the land, but not on any developmental value, and it is currently 100% for owner-occupied farms and 50% for landlords who let out their farmland. However, the government are making changes to this relief from the 6th of April 2026, with only the first £1m of agricultural property receiving the full 100% relief and any further agricultural property receiving relief at 50%, meaning any agricultural property over the £1m is taxed at an effective rate of 20%.

If a farm is jointly owned by a married couple or those in a civil partnership, they would be able to make use of their full NRB and RNRBs as well as £1m of agricultural relief each. However, unlike the NRB and RNRB, this £1m allowance is not transferrable to a spouse/civil partner on death. Therefore, a couple could only pass down up to £3m to the next generation completely IHT-free provided £1m was passed on to beneficiaries other than the remaining spouse/civil partner on the first spouse’s/civil partner’s death. If this were not the case, only up to £2m would be able to be passed on IHT-free. As a result of these changes, the government have estimated that 75% of farmers will not be affected by these changes. However, this means 25% of farmers will now leave IHT bills to their beneficiaries upon the transfer of their farming property.

How Can I Reduce My IHT Liability?

Gifting Allowances

There are a number of gifting allowances which can be utilised to reduce the size of your estate and subsequently an IHT liability for your beneficiaries:

Every individual has an annual exemption of £3,000 per tax year, which can be gifted with no IHT consequences. If any of the allowance is unused from the previous tax year, this can be carried forward to the current tax year. Therefore, a couple who did not use their allowances last tax year, can gift up to £12,000 between them IHT-free this tax year, and £6,000 per year thereafter. 
Gifts of up to £250 to any one person in any one tax year are also exempt. This exemption can be used any number of times in respect of different recipients. However, it’s important to note that this exemption cannot be used in addition to larger gifts. For example, if an individual made a gift of £3,250 using up their £3,000 annual exemption, the £250 small gift exemption would not cover the excess amount over the £3,000. However, it’s still possible to make an unlimited number of small gifts of £250 to individuals other than the recipient of the £3,000 gift, in addition to this annual exemption amount. 
Individuals can also make gifts out of their ‘normal expenditure’. To be exempt, these gifts must be made out of an individual’s income, and it must be part of their normal expenditure meaning it is habitual or regular, not just a one-off payment. Payments do not have to be a fixed amount each time, but they must be consistently regular, and the individual must be left with sufficient income to maintain their usual standard of living after allowing for all transfers from normal expenditure. 
There are also various other gifting allowances such those for making wedding gifts and gifts to charity.

Lifetime Gifts

Lifetime gifts can be made over and above these gifting allowances, but they would be constituted as either a Potentially Exempt Transfer (PET) if made to an individual or a bare or disabled trust, or a Chargeable Lifetime Transfer (CLT) if made to the majority of other types of trusts.

If a PET is made and the donor survives for 7 years, the gift becomes fully exempt and escapes tax entirely. However, if the donor does not survive for 7 years after the gift has been made, there may be some IHT to pay.

When a PET is initially made, it uses up the NRB. For example, if an individual makes a PET of £100,000, their NRB allowable against their estate if they were to die before 7 years had passed, would be £225,000. Once 7 years have passed, the NRB would be £325,000 once again.

IHT tapering relief also applies to PETs that are in excess of an individual’s NRB, and they pass away after 3 years of the gift being made which is outlined in the table below. 

For example, if an individual makes a PET of £350,000 in January 2020 and passes away in March 2023, they have used up their entire £325,000 NRB and therefore £25,000 of the gift will be liable to IHT. However, as 3 years have passed since the gift was made, the effective rate of IHT would only be 32% meaning the beneficiary would only pay £8,000 instead of £10,000. In this example, the original donor would have no NRB to offset against their estate as it has been used up by the £350,000 PET, therefore, the beneficiaries of the estate may be liable to pay more IHT.

Whole of Life Insurance Policy

Other avenues can be explored to make plans for your estate and your beneficiaries such as taking out a whole of life insurance policy, with the sum assured being equal to your projected IHT liability. This can be a relatively cost-effective way of making provisions to cover your IHT bill, especially if the policy is taken out earlier in your life which would result in lower premiums. It is important to ensure these policies are written into trust in order to ensure any beneficiaries would receive the full amount otherwise, the lump sum payout would form part of the estate and would therefore be liable to IHT itself.

How we can help

Inheritance tax planning can be an incredibly complex topic, especially when involving trusts. This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions.

If you are concerned that you may be affected by the changes the government has made to agricultural relief or about your IHT planning in general, please feel free to contact us to book a free initial consultation with one of our expert advisers. We’d be happy to discuss how we might be able to provide you with value and peace of mind going forwards. 

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This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions.

The Financial Conduct Authority (FCA) does not regulate estate planning, tax or trust advice.

The information contained in this article is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change.