Succession planning for agricultural estates
Farm succession has been brought under the spotlight as families face intensified pressure to plan and sustain the commercial and economic viability of the farm.
As part of the Autumn 2024 Budget, the Government has announced that it will restrict the availability of agricultural property relief (APR) and business property relief (BPR) from inheritance tax (IHT) from 6 April 2026. Whilst the detail will not be known until later in the year, reviewing your farming business succession plan with your professional advisers may prove to be more important now than at any other time in the last thirty years. What is agricultural and business property relief?
Agricultural and business property relief applies to qualifying assets eligible for 100% agricultural property relief and 100% business property relief. This means these assets are excluded from Inheritance Tax calculations when their owner dies. This relief is available in addition to the existing nil-rate bands and exemptions. However, from 6th April 2026, this relief will be capped.
What has changed?
Under the Government’s proposals from 6th April 2026, agricultural property relief and business property relief will be capped at £1 million of qualified assets. The value of assets in excess of £1 million will be taxed at 50% of the current Inheritance Tax rate. The UK government has also indicated that the £1 million cap is a combined value of agricultural and business property assets. If the Inheritance Tax rate remains at 40% at that time, the IHT charge for the value of qualified assets in excess of £1 million will be 20%.
Until now, ownership has traditionally been retained by the parents until death to leverage the 100% APR and BPR exemptions but this will require a fresh mind-set which will demand earlier transition of equity and clearer family agreements. But we would warn against rushing into knee-jerk fixes.
What to consider when carrying out succession planning
You must consider the options available to deal with agricultural and business property as part of the succession planning process and at this stage it will be worth really clarifying, ‘Who owns what in the business and quantifying what they actually own?’ Only then will you be able to start a meaningful discussion on the structure of the business and the valuation of the assets.
Once your family is clear where your business is going and who is part of that future, it will be vital to discuss any prospective succession planning outcomes in a joined-up approach with your accountants, land agents, and legal team before embarking on any negotiations. At Thompson Smith and Puxon we can assist you with clarifying whether ‘governing documents’ such as property title, balance sheet accounts, partnership agreement provisions, shareholders agreement provisions and current wills are consistent with each other.
In recent years, APR and BPR has up until now applied to qualifying assets for 100% relief and therefore there has been less focus on the value of the assets falling under the broad brush of qualifying assets. You should no longer just rely on farm accounts which may reflect historical purchase values. You will now require a full detailed assessment, with valuations, of the freehold land, entitlements, livestock, crops, machinery and pensions, including where those values sit between family members.
Lifetime gifting and taper relief (the 7-year rule)
Gifting ownership of assets during your lifetime is an effective way of reducing your exposure to Inheritance Tax. However, you should avoid gifts with reservations, where you continue to enjoy the benefits but no longer own the asset. If this is an income-generating asset, you should reduce your income accordingly. If you successfully do this and survive for at least seven years, the gifted asset will no longer form part of your estate for Inheritance Tax purposes.
Splitting ownership
If you own assets in your own name, consider transferring a share in the asset to your spouse. If you split the asset with your spouse, you immediately reduce the asset's value as part of your estate by the amount you have shared. You might also consider splitting the assets with the next generation and their spouses. This further dilutes your estate, but care should be taken about potential future separation or divorce. You might want to combine any asset split with a post-nuptial agreement.
When you split ownership, in addition to each individual’s allowances, they each have £1 million of agricultural and business property relief.
Life Insurance
You might consider taking out life insurance that is paid out with your estate and designed to cover all or part of the Inheritance Tax your estate will face or any Inheritance Tax payable as a result of a lifetime gift made within seven years of death.
Paying the Inheritance Tax liability over 10 years - interest payments
Whilst the facility to pay your Inheritance Tax in equal annual instalments over 10 years will be likely to continue, the Treasury has indicated that the interest on your instalments will no longer apply under the new tax regime. The option to pay Inheritance Tax by equal annual instalments over 10 years, interest-free, will be available to qualifying agricultural and business property.
Seek professional advice
Trying do-it-yourself fixes to something as complex as succession planning is not sensible. You should always seek professional legal and financial advice and develop strategies that meet your needs. Farming charities such as the Royal Agricultural Benevolent Institution and the Farming Community Network are both well placed and resourced to assist you if you find yourself under significant financial pressure and family tension.
If you would like to discuss any of the legal or practical considerations discussed in this article with Thompson Smith and Puxon, please contact Senior Associate Alex Butler-Zagni on 01206 217025 or e-mail Alex@tsplegal.com. Alternatively, please click here for more information about TSP's Agriculture services.