October 29, 2024
Article
With increasing levels of farm diversification, the potential threat to inheritance tax (IHT) reliefs and rising land values, many farmers are becoming more concerned with their succession planning and the options available.
The new government has announced their first Budget for 30 October 2024 and whilst their manifesto stated that rates of income tax, corporation tax and VAT would not be increased, they remained silent on both capital gains tax (CGT) and IHT.
The office of tax simplification has also previously suggested that both business property relief (BPR) and agricultural property relief (APR) are too generous, as is the ability for property values to be rebased to market value at the date of death for CGT purposes.
As a result, farming businesses that have previously been able to pass assets to the next generation tax efficiently could soon face significant IHT liabilities. Historically, non-farming assets, such as holiday cottages and investment properties, have often been left to the non-farming children, leaving the farm intact for the next generation.
The favourable CGT reliefs for FHLs have proved to be a useful planning tool in the past but these will only be available up to 5 April 2025 – see separate article.
Many have also relied on the Balfour test to pass non farming assets to the next generation within the main business – as a reminder, provided the business is 50% trading overall, the ‘whole’ business should qualify for BPR and therefore can currently be passed on to the next generation IHT free.
Without looking at other options, chargeable assets could therefore remain within the estate at death, increasing the potential charge to IHT at a rate of 40%. For example, on a cottage with a value of £250,000, without any planning this could result in IHT of £100,000.
The use of a trust to remove value from an estate without incurring a CGT liability at present still exists as does making lifetime gifts of assets that do not have an underlying capital gain – cash or assets that have not increased in value substantially – is likely to become more popular. Bringing the next generation into the business as partners earlier than previously anticipated could also help.
Consideration will also need to be given to non-trading assets, such as investment properties that are included within the business. As noted above, many farms and estates are currently relying on Balfour. However, there has been suggestion that the rules could be tightened to increase the point at which the whole business qualifies for relief from 50% overall trading to 80%. A significant number of farming businesses and estates could find themselves not qualifying under these tighter rules and facing a large IHT liability.
As a reminder, if the whole business fails the test, it is not just the non-business assets that become chargeable, the trading part could become liable too. Some businesses may therefore need to consider restructuring so that the investment assets are removed from the main business - accepting that IHT will be due on these - but protecting the remainder from losing relief.
In summary, there are a number of threats to the current IHT reliefs which could mean many farms and estates will face significantly larger IHT liabilities than in the past.
Succession planning is therefore even more crucial than before to enable assets to be passed to the next generation as tax efficiently as possible.