Succession planning for farmers

John Rouse, partner in our Private Client team, discusses the changes to Agricultural Property Relief and Business Relief announced in the Budget and why the announcements provide an opportunity for farmers to engage with succession planning at an early stage.

Following Rachel Reeves’ Budget Statement at the end of October, the key changes to capital taxation were the changes to Agricultural Property Relief and Business Relief (formerly Business Property Relief) with combined reliefs at 100% capped at £1,000,000 and 50% available on any excess. For farmers and business owners, this has a huge impact on their estate and succession planning.

Up until the Budget, capital taxation for farmers and rural landowners has encouraged farmers to retain their land and business until they pass away on the assumption that their farming and business assets will attract 100% inheritance tax relief, and the assets revalued for Capital Gains Tax purposes upon their death. However, the new Budget announcement turns those general principles completely on their head. Whilst we await the finer detail of the new announcements, the general principle seems to be that farmers and rural landowners need to consider their estate and succession planning at an earlier stage and look at transferring farm and business assets to the next generation during their lifetime rather than via their will.

The new rules

For farmers, the Agricultural Property Relief and Business Relief at 100% rate is capped at £1,000,000 worth of assets. In addition to that, they will also have their inheritance tax allowance of £325,000 plus £175,000 Residence Nil Rate Band allowance. This gives a total of £1.5m available before IHT becomes payable. For married couples, taking into account their combined inheritance tax thresholds and Residence Nil Rate Band allowances of up to £1m, with the combined APR/BR allowance, this gives a figure of up to £3,000,000 before inheritance tax becomes payable.

When dealing with will and inheritance tax planning for farmers – generally speaking – inheritance tax has been an issue when the surviving partner dies, and many couples will simply leave their estate to each other and rely on the fact that transfers between spouses are exempt from inheritance tax, and they can leave any inheritance tax liability to be paid on the second death. However, the new rules give farmers an opportunity for greater estate and succession planning during their lifetimes and when the first of them passes away.

Key succession planning considerations

The Budget did not make any changes to the rules regarding lifetime gifts, in so far as if an individual gives an asset away, provided they survive by 7 years, the value of that asset no longer forms part of their estate for inheritance tax purposes. Therefore, farmers should consider their succession planning at an earlier stage and look at passing on farming and business assets to the next generation, or into trust during their lifetime, particularly whilst there is a good prospect for them to survive for a further 7 years.

Likewise, for married couples, when the first spouse passes away, the surviving spouse and family should look at utilising any APR or BR that may be available on assets at their death. Those assets can be transferred to the next generation or into a trust to use the relief that is available. As a result, those assets can be ring-fenced outside the survivor’s estate who themselves will be entitled to £1,000,000 worth of APR/BR at 100%. The new rules suggest allowances cannot be passed on to surviving spouses, so it is important to use any available relief on the first death.

Married couples and civil partners should look at equalising their estates so that any farming or business assets are owned jointly between the couple so that when the first one passes away, there is an opportunity to use any relief that is available on half of the farm and business assets.

Business structures will need to be reviewed as there will be a greater incentive for farming families to pass land down the generations. However, families will want a structure in their business to provide some reassurance and control on assets. This can be achieved by including an appropriate voting structure within partnership agreements or company structures to give control as to how farm and business assets are dealt with.

With some judicious, well-timed planning, considerable inheritance tax savings can be achieved by maximising the available allowances, reviewing business structures, and timely use of lifetime giving and lifetime trusts.

Early planning

The Budget certainly brings challenges for farmers and rural business owners and will require some detailed estate and succession planning. However, with appropriate planning at an early stage, many of the potential inheritance tax liabilities can be managed and mitigated in such a way as to reduce the overall inheritance tax liability for farming families.

One of the age-old issues with farming families is not engaging with succession and estate planning issues at an early stage, with some farmers reluctant to consider transferring assets to the next generation until it is too late. Whilst Rachel Reeves’ Budget was not intended to prompt early engagement with succession planning, perhaps the new changes will encourage farming families to review farm business assets and plan at a much earlier stage.