Farming is a huge part of life for many here in North Devon and there is growing concern at the Government’s decision to change Inheritance Tax rules for farmers (and others in business).
Shortly we shall be writing to clients to clarify some of the changes in the recent Budget from Chancellor Rachel Reeves and suggest some options that may be open to help mitigate the new tax rules – following a proper discussion with their financial adviser, of course.
Until now, farming businesses had qualified for up to 100% Inheritance Tax (IHT) relief on agricultural property and business property.
Now the tax is imposed on farms worth more than £1million with an effective tax rate of 20% on assets above the threshold, rather than the standard 40% IHT rate.
The Government says the actual threshold before paying IHT could be as much as £3m, once exemptions for each partner in a couple and for the farm property are taken into account.
Just to be clear: if a taxable farming estate is valued at £1.5m at death, you would only pay tax on the extra £500,000, not the entire sum.
The first and obvious thing to ensure is to split ownership between spouses to avoid IHT on first death – and the combined thresholds would then apply.
It’s also important to remember that grand farm houses even now do not qualify for 100% agricultural relief if they are considered disproportionate to the farming business.
How many farming families will be affected by this here in North Devon is not easy to quantify – farms tend to be asset rich and cash poor, so once you take into account a period farmhouse, multiple outbuildings and even a mere 50 acres, it soon adds up.
The latest estimates from the NFU suggest 75% of commercial farm businesses of more than 50 acres could be affected. The Government points to 2021/22 figures that suggest 27% will be affected, so there is a serious discrepancy in projections.
The Budget also included most unused pension funds and death benefits within estates for Inheritance Tax from April 2027 and individual exempt thresholds are frozen at £325,000 and ‘extra residential allowance’ at £175,000 – of course, nothing is becoming cheaper so this pulls more into the ‘IHT trap’.
So what can farmers, or anyone concerned about IHT do? As far as pensions go, it is suggested those with an ‘inevitable’ IHT liability and who have a spouse or civil partner should amend any death benefit nomination back for their partner by April 6, 2027 (instead of say children, other family or friends). This is because inter-spouse transfers and legacies remain free from IHT.
Gifting parts of the estate to others – don’t forget seven years must pass before the gift is free of IHT – such as close family or minors, may be a wiser course but to repeat a phrase ‘once it’s gone, it’s gone’. In other words, once the gift passes out of your hands you usually have no control over the capital at all and even close family relationships do sadly change over time, so this option needs careful consideration.
It is rather complex with few escape routes. However, individuals may benefit from investing capital in the EIS (Enterprise Investment Scheme with significant tax relief – as well as deferring (or avoiding) a Capital Gains Tax bill, but the schemes can be high risk and returns cannot be guaranteed, so a great deal of advice and forethought is required.
There is of course a lot to consider. Wills may need altering, gifting may be a viable option but it is wise for both the donor and ‘donee’ to receive some guidance first.
Do not make quick, knee-jerk decisions!
If you are one of our clients, you will soon receive a more detailed letter with some of our thoughts and possible solutions outlined but as ever you are welcome to contact us to discuss anything and even if you are not a client, we will still be happy to hear from you.
