“Impossible Tax”

On 19 November 2024 an estimated 20,000 farmers rallied around Whitehall to voice their anger at the Government’s inheritance tax (IHT) reforms. The numbers clearly show that their claims suggesting the changes would only affect a minority of farms do not reflect the reality. In fact, the NFU suggests that “around 75% of commercial family farms” will therefore be affected.

Professional advisers for the farmers are awaiting the consultation bound to take place in early 2025, as many farmers are already losing sleep over future proofing the family farm for the next generation. The new regime is already being referred to as “impossible tax” as for many farmers, it will be impossible to raise sufficient funds to pay the tax bill. 

Planning considerations 

Lifetime gifting has been suggested as a mitigation measure. However, the donors needs to consider any Capital Gains Tax (CGT) consequences. Although hold-over relief is available in relation to agricultural property, it does not necessarily apply to businesses, particularly if the activities carried out include both trading and holding investments. Business owners should speak to their advisers about potentially re-structuring the entities before they are gifted. 

Married farmers need to bear in mind that the £1m allowance is not transferable between spouses, so it will be impossible to increase the threshold to £2m on the second death. In fact, Wills should be updated before April 2026 so that a legacy of £1m is carved out, as it will be lost if not secured.  

Lifetime giving may not be a realistic option from a practical point of view either. Removing an income generating piece of land from a working farm hardly makes commercial sense. Those who thought they could continue living in the gifted farmhouse or farming the gifted land, will be caught by the gift with reservation of benefit rules and no IHT saving will be made on their death. This can be avoided by paying a market rent for the use of the land or occupation of the property. If you can afford it of course. 

Is a trust an option? It is important to remember that although trusts can be an excellent way to manage succession, they are not a silver bullet to the IHT problem. 

Trusts set up before 30 October 2024 will have their own £1m allowance, therefore retaining existing trusts and moving agricultural and business assets into them is a possibility. There is a short window before April 2026 to transfer such assets into a new trust without an upfront inheritance tax charge if the settlor survives for seven years. After that date, there will be a charge of 10% on the transfer of the assets and a further 10% charge if the settlor does not survive for 7 years. 

Trusts are also liable to a 6% tax charge on every 10 year anniversary and there is an exit charge when the assets are transferred out. On top of the tax implications, there are also ongoing administration costs to consider. Trusts also remove assets from the ownership of the farmers, who may struggle to take out loans or agricultural mortgages to raise capital for various farm-related purchases. 

Paying the IHT bill 

What options are there? For those who can afford it, taking out a life assurance policy can be a good alternative. Some of course will be too old or unwell to qualify for any sort of affordable arrangements. 

There remains the option of paying the IHT off in 10 equal annual instalments post-death. However, for many this will simply mean selling off parts of the farm or business leading to it becoming unviable commercially in the long run. 

Rather than simplifying and securing the future of farming, the government seems to have made it even easier for the hobby farmers and tax dodgers to purchase the £1m paddock, which will of course be passed down tax free. At the same time those who work the land to feed the nation will be forced to sell up and abandon their generational livelihood. 

The contents of this email are a general guide only at the date of publication. It is not comprehensive, and it does not constitute legal advice. Specific legal advice should be sought in relation to the particular facts of a given situation.

The research finds that rather than the 27% suggested by Government, it is expected that 75% of commercial family farms will be above the £1m threshold.

https://www.nfuonline.com/updates-and-information/an-impact-analysis-of-apr-reforms-on-commercial-family-farms/