Be smart about passing on assets before you go

Farming businesses will be particularly affected by Inheritance Tax changes, says Alexandra Lane

In October 2024 the Chancellor reformed Inheritance Tax (IHT) reliefs available to individuals. Previously, Agricultural Property Relief (APR) and Business Property Relief (BPR) was available on a deceased’s estate at 100 per cent. This relief is now only available on the first £1 million of the deceased’s agricultural and business assets. The value of the estate above £1 million will now be taxable at 20 per cent.

Farming businesses will be particularly affected by this change, impacting both landowners and agricultural tenants. The million-dollar question(!) is how does one protect as best as possible against the reduction in APR and BPR? Unfortunately, the answer is not a straightforward one.

For many farming businesses, assets are held in the name of one or two individuals, or are included in the partnership balance sheet. We regularly work with accountants and land agents to review farming business structures and provide advice on how to mitigate IHT liabilities. Having worked with a wide range of farming businesses, it is clear that there is no ‘one size fits all’ advice. How best to protect the next generation from a potential sizable tax bill will depend on the business structure, the age of the individual and the assets owned.

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Some view the simplest ‘solution’ to be to transfer assets to the next generation now. This removes the asset from the giftor’s estate, provided they survive for seven years after the gift is made. If they die before the seven years are up, the asset still forms part of their estate, but at a tapered value after three years. However, it is important to note that a gift or transfer may have Capital Gains Tax (CGT) implications. The CGT liability can be held over by the giftee until the land is sold, or the giftee dies. The worst-case scenario here would be if the giftor were to die within the first three years of transfer, the land would form part of their estate and be eligible for IHT. This may mean that part of the land will need to be sold to cover the IHT bill, triggering payment of the previously held-over CGT. As noted, this is a worst-case scenario, but an effective example of how careful consideration is required before any hasty decisions are made.

A popular form of protection when gifting or transferring land is for the giftor to take out a life assurance policy to protect against the seven-year survivorship rule. Again, this is not a copy and paste answer and while it may be an effective solution for a 60-year-old landowner, the same cannot be said for an 80-year-old.

The value of a tenant’s interest in a secure agricultural tenancy governed by the Agricultural Holdings (Scotland) Act 1991 is excluded from the valuation of a deceased’s tenant’s estate for IHT, but any capital improvements carried out on the let farm for which compensation will be due to the tenant at waygo will be included in the IHT computation.

Our advice remains steadfast; succession planning is an extremely important aspect of business planning. Reviewing and planning at an early stage, and taking legal and taxation advice alongside one another is of utmost importance. Having a plan in place which can be amended through the years if taxation changes occur puts the business owner in a much stronger position. After all, there is nothing more certain in life than death and taxes!

Alexandra Lane is a Director, Shepherd and Wedderburn