In our previous article, Inheritance Tax for Farmers: A Changing Landscape, we explored the significant changes to Agricultural Property Relief (APR) and Business Property Relief (BPR) and the impact they will have on farming businesses. Now, as these new rules are set to take effect, it's crucial to explore the strategies you can adopt to safeguard your family farm and ensure a smooth succession plan.
Estate planning is no longer just about drafting a simple Will. With the evolving tax landscape, proactive planning is vital, especially for farming families who face the challenge of passing on valuable assets while navigating the complexities of Inheritance Tax (IHT). This article will explore essential strategies, from lifetime gifting and Wills to the importance of Powers of Attorney and Legal Rights planning. By considering these elements now, you can protect your family's legacy and help avoid unnecessary tax liabilities down the road.
Planning Strategies
The new IHT reforms are expected to significantly impact the way farming businesses are passed on. To mitigate the effect these changes will have on your estate, a proactive approach to estate planning is essential. Often a combination of strategies is required to protect your business. Here are some key strategies to consider:
Lifetime Gifting to Individuals or Trusts
Firstly, you might want to consider lifetime gifting to transfer all or part of the farm before your death. This can help reduce the value of your estate for IHT purposes.
Generally speaking, if you survive the gift by a period of 7 years, the value will fall out of your estate for IHT purposes. Any gifts made within the 7-year period will reduce or potentially exhaust the IHT relief available on your death. However, it's crucial to be mindful of the transitional rules already in place here, so ensure that you take appropriate legal advice before making any significant gifts.
If it seems likely that the person making the gift won't survive the 7-year period, insurance could be an option to help cover the potential tax liability. Depending on the person's age and health situation, this may not be feasible, but it's worth considering as part of your overall planning strategy.
Trusts can provide an alternative route for gifting. Creating a Trust can allow you to transfer assets while maintaining control over them during your lifetime. Trusts can help ensure your farm stays within the family, even after you're gone. They come with their own set of regulations and potential allowances, which we can guide you through. The new rules will affect how Trusts are treated for APR and BPR purposes. HMRC's Consultation here recently closed and we await the outcome.
Wills
In addition to lifetime transfers, it is important to consider the position on death. A properly drafted Will is essential to ensure your Executors can claim the maximum IHT relief. Traditionally, many married couples leave their estate to the surviving spouse, with the estate then passing to the children. Transfers between spouses are free from IHT and so this approach was tax efficient in the era of uncapped APR/BPR, which would be available on the second death. As the £1 million APR/BPR band is not transferrable between spouses, taking this traditional approach means a potential loss of £1 million IHT relief for the family.
Instead, consider building flexibility into your Will. Discretionary trust arrangements can be included to ensure that the £1 million band is not lost on the first death. The Trustees would have discretion as to who this sum is to pass to. If the band becomes transferrable between spouses, they can consider making it over to your spouse, failing which assets can be passed to alternative beneficiaries, perhaps children or grandchildren, following the first death to ensure the valuable IHT relief is preserved. Although more complex and slightly costlier than a more traditional Will, this structure can provide significant tax savings in the long run as well as giving Trustees the ability to take account of the changing needs of your family members or other beneficiaries.
With this approach, your Will would be supported by a separate Letter of Wishes. This document allows you to provide guidance to your Trustees on how the estate should be managed, taking account of both tax planning and family dynamics. Although not legally binding, it offers a level of flexibility and control. You are free to update your Letter of Wishes as often as you like during your lifetime, ensuring the distribution of your estate remains fluid and adaptable to your evolving circumstances.
Legal Rights
The concept of Legal Rights is another important consideration in Scots law, especially for farming families who have business success goals to meet. These rights ensure that spouses/civil partners and children cannot be disinherited, regardless of the terms of your Will. If not carefully managed, a Legal Rights claim on death can disrupt your succession plans, particularly where one or more of your children will not be receiving a share of the family business.
It is crucial that Legal Rights are considered as part of any lifetime estate planning review. While it is possible to seek to avoid claims by making alternative provision for non-farming children, a safer option is to ask these children to give up their Legal Rights entitlements before you die. Children over 18 can be asked to renounce their Legal Rights through a lifetime renunciation, agreeing not to make any claims on your estate upon your death. We can help you to start this conversation to prevent unnecessary complications following your death and ensure that your farm is passed down according to your wishes.
Powers of Attorney
While Wills and gifting strategies are important, Powers of Attorney are an often overlooked but vital part of the estate planning process. A Power of Attorney allows you to appoint trusted individuals (your Attorneys) to manage your financial affairs and personal welfare if you lose legal capacity.
For farmers, this includes the management of business interests, which is essential for ensuring continuity of operations and safeguarding your family's future. A financial Attorney can deal with any and all financial matters, including banking, paying your bills, dealing with pensions and even take action on your behalf to implement IHT strategies. It is therefore important to ensure that you have appointed appropriate people in this role.
IHT Insurance
In some cases, IHT insurance can be a useful strategy to protect your farm from potential tax liabilities. This option is particularly beneficial if your estate exceeds the available IHT reliefs and lifetime gifting is not a viable option.
We can help you assess your exposure to IHT and work with a financial advisor to find the best coverage for your situation. Insurance helps provide the necessary funds to cover tax liabilities, meaning that your estate does not have to sell assets to fund its increased IHT bill.
The time to act is now
Estate planning is more complex than ever, especially with the changes to APR and BPR on the horizon. With just over a year before these reforms take effect, now is the time to review your estate plan and take action. Tailored advice is essential, and the strategies outlined here – lifetime gifting, flexible Wills, Legal Rights planning, Powers of Attorney and IHT insurance – can provide a solid foundation for ensuring that your farm remains in the family for generations to come.
Related article: Inheritance Tax for Farmers – A Changing Landscape
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
