Inheritance tax – helping farm owners plan for the future

Categories: News

They say that nothing is certain in life except death and taxes – and that is truer now than ever for farmers after the Chancellor introduced major changes around agricultural land and inheritance tax.

Prior to last year’s Autumn Budget, the vast majority of farms were entirely exempt from inheritance tax thanks to the Agricultural Property Relief (APR) and Business Property Relief (BPR). By using a combination of these two policies, farm owners were able to leave land and assets such as machinery to their relatives without paying any tax.

It was a stance that was seen to support British agricultural and acknowledged the fact that many farming businesses are asset rich but cash poor.

However, the Government has capped the tax relief at £1 million, meaning any land or assets above that value will now be subject to inheritance tax.

There are still special benefits for farm owners, who pay 20 per cent inheritance tax rather than the 40 per cent non-farmers face. Furthermore, beneficiaries can pay the tax bill over 10 years, interest free, rather than the seven per cent interest rate non-farmers are subject to.

Furthermore, two people who jointly own a farm can usually pass on land and property up the value of £3 million tax free as they are able to combine their two £1 million allowances, along with two lots of the normal £500,000 tax exemptions everyone has.

The Government argues that the changes will prevent millionaires and billionaires from using land ownership to avoid inheritance tax. The Chancellor claims that 72% of farms won’t be affected, but this is disputed by the National Farmers’ Union (NFU) and other interested groups.

For those who want to pass farmland and assets to children or grandchildren in a tax efficient manner, there are still options.

Gifts

Perhaps the simplest way to avoid a hefty inheritance tax bill is through gifting. If an individual makes a gift to someone else – normally a descendent – and survives at least a further seven years, the value of the gift falls outside of inheritance tax.

Should the landowner not survive at least seven years, then taper relief may apply to reduce the inheritance tax.

Farmers may, therefore, wish to consider handing over the reins to the family business sooner than they otherwise would have done.

Creating farm partnerships

Some farmers would benefit from spreading the ownership of the business over multiple family members. By doing so, it increases the number of £1 million limits. For example, if four people legally own the farm, the combined assets would have to exceed £4 million – not including the normal £500,000 tax exemptions – to incur inheritance tax.

Having additional people involved in ownership can, however, add complexity to the day-to-day running of the business and can make fast decisions more difficult.

Life insurance

Insurance can be purchased to mitigate against inheritance tax liability but, as you would expect, the overall cost of such insurance can often exceed the inheritance tax bill, particularly if the person taking out the insurance is older.

For many owners of smaller farms, the much-talked-about changes to inheritance tax will make no different whatsoever. However, if you do have a farming business with overall assets in excess of £1 million, it is worth thinking about the future.

At ORJ, we have extensive experience in agricultural law, succession planning and will writing. Speak to us today to explore all the options available to you.

Call Fiona on 01785 223440 or email team@orj.co.uk