Don’t Panic Yet: Understanding The Inheritance Tax Changes on Farms and Estates

This entry was posted on Thursday, November 21st, 2024 at 2:35 pm

Rod Cordingley, a specialist in valuation and asset management at Stephensons Rural, discusses the implications of recent Inheritance Tax changes for farms and estates.

For years, I’ve advised that tax decisions should not override good business decisions. This has always been a challenge for owner-occupied farms and estates, where there has been 100% relief from Inheritance Tax (IHT) and the added benefit of an uplift in the base value for Capital Gains Tax (CGT) when assets are passed on after death. It’s generally been the right decision to leave assets with the older generation until death.

However, after the recent budget, it’s becoming impossible to ignore the implications of Inheritance Tax when planning business decisions for these types of farms. The potential tax liabilities involved can be significant. Most of the farms and estates we work with are asset-rich but cash-poor, and the current proposals for Inheritance Tax are nothing short of vindictive. They show a complete lack of understanding of the capital tied up in a viable, working farm in the 21st century.

I support the initiatives aimed at convincing MPs and parliamentary decision-makers to see sense and reconsider, and my advice at present is: don’t panic. Wait until all the facts and details of the legislation are available. In the meantime, it’s wise to prepare an inventory of what is owned, whose name(s) the ownership is in, whether any of the property is part of a partnership, and what outstanding borrowing remains. This will help your professional advisor estimate your potential IHT liability under the current proposals, taking into account personal reliefs, agricultural property relief and business property relief.

Remember, property left to a spouse at death is free from IHT so this option should be considered until you can make an informed decision on the future ownership structure. It might be a bit radical to suggest you do not fly together now when going on holiday and perhaps that is a personal decision!

Bringing the next generation into the ownership structure and surviving seven years may now seem like a more sensible option. However, with the divorce rate approaching 50%, it’s crucial to seek the right advice before rushing into that decision. Trusts can also be useful but may still incur an IHT liability, so again, expert advice is essential. Long-term tenancies can be used to reduce capital value, but valuers are now dusting off their textbooks to revisit the finer points of tenancy valuation for IHT – something we haven’t had to deal with in the past 30 years.

At this stage, the advice remains the same: don’t rush into a decision until the facts are clear, and the legislation is confirmed. Just recently, at the NFU conference, Steve Reed, DEFRA secretary, announced that there would be no changes to IHT, as he didn’t want to disrupt the farming community. If that’s the case, then a reversal or alteration of the £1 million  limit could be just as easily rolled back.

However, doing nothing is not an option in my view. Every farm business should seek professional advice to fully understand the implications of potential IHT changes, explore the options available, and develop a plan that suits the specific circumstances of that business. This might mean that tax decisions override business efficiency decisions – but if it ensures the survival of the business, surely that’s worth it.

We are here to help you make informed decisions about inheritance and succession planning. Contact us to discuss how we can support you in developing a strategy that aligns with your business goals and prepares you for future changes.

Contact Rod Cordingley at Stephensons Rural.

rlc@stephenson.co.uk
01904 489731