The recent Labour budget introduced significant changes to inheritance tax (IHT) laws that could impact farm businesses across the UK. Understanding these changes and how to best prepare for them is essential for farm owners seeking to protect their legacy and pass on assets effectively. Failure to grasp these changes could lead to unexpected tax liabilities and potential loss of assets. Here, we’ll unpack the new agricultural and business allowances and provide strategies to help farmers mitigate inheritance tax on their valuable properties and assets.
Overview of Inheritance Tax (IHT) for Farmers
Inheritance tax has traditionally been a complex issue for farm businesses due to the unique nature of agricultural assets and family-owned land. Under previous legislation, farmers benefited from various reliefs, notably Agricultural Property Relief (APR) and Business Property Relief (BPR), which helped mostly eliminate IHT on farm-related assets. However, the new budget introduces specific changes to these reliefs alongside additional allowances.
Introducing the New Agricultural and Business Allowances
1. Agricultural Property Relief
This allowance applies directly to farmland, crops, and specific farming equipment. The allowance effectively reduces the taxable value of agricultural assets. Full Agricultural Property Relief is now capped at £1,000,000. In County Armagh farmland, that’s about 40/50 acres or so, so nearly all farms will be caught with a portion above this limit. It further fails to account for machinery, livestock etc. Farm owners should assess which assets meet the allowance’s strict definition to maximize their eligibility. Asset value above the £1,000,000 threshold is taxed at defacto 20%. e.g. a £2,,000,000 farm will have £1,000,000 above the threshold and an inheritance tax bill of £200,000.
2. Business Allowance
Farm businesses that diversify, such as those involved in tourism or renewable energy, may qualify for the new Business Allowance. It’s also arguable that the machinery will fall into the BPR section. This is also capped at £1,000,000 with the same defacto 20% tax on assets above this. However, only core assets and income related to the agricultural trade will be eligible, which may limit the benefit for farm businesses with diverse income streams.
Key Strategies to Mitigate Inheritance Tax for Farmers
To minimize the IHT burden, there are several strategic options for farm owners under the new regime:
1. Lifetime Transfers of Assets
Transferring assets during one’s lifetime can be a powerful way to reduce IHT liability. By gifting assets to heirs at least seven years before death, farmers can potentially avoid IHT on these assets altogether. However, with recent budget provisions, ensuring that assets qualify for APR or BPR upon transfer remains essential. It is also essential the person making the gift gives up control and the benefit of the asset (or it will be deemed a Gift With Reservation of Benefit). One solution – gift the assets and the farm business then pays a salary to the person making the gift.
2. Joint Ownership and Spousal Transfers
Having both spouses legally registered as farm owners as tenant’s in common is another effective strategy. Transfers between spouses are generally IHT-free, allowing farms to pass tax-free between spouses. There is no indication if the £1,000,000 APR tax free allowance is transferable, so therefore if both spouses hold a half share of the farm and gift it to the next generation a farm up to £2,000,000 can pass without IHT.
Planning for Future Generations
Planning for succession is essential in a farm business. Training the next generation to take over the business or assigning clear roles and responsibilities can ensure that the farm remains eligible for APR and BPR. With the right guidance, these changes can be navigated effectively, ensuring the continuity of family farms for future generations. The Labour budget’s changes make it more critical than ever for farm owners to seek tailored legal and financial advice. Properly structuring a farm’s ownership and asset transfers can significantly reduce the tax burden on heirs, ensuring that family farms continue as viable businesses for future generations. With expert guidance, farm owners can navigate these changes with confidence.