With the introduction of the new Inheritance Tax (IHT) rules in the October 2024 budget, succession planning is more important than ever in order to look out for future generations.
Much has been said and written about the new Inheritance Tax (IHT) rules announced by the Chancellor in her October 2024 Budget. While many of us were expecting changes to the available tax reliefs, what we have ended up with is much more far reaching than many of us anticipated.
By now we are all familiar with the new rules whereby Agricultural Property Relief (APR) and Business Property Relief (BPR) are as from April 2026 to be restricted to a relief at 100% (provided all usual relief conditions are met) on the deceased's first £1million of agricultural and business assets. Thereafter the qualifying assets will be subject to an effective IHT rate of 20%. As opposed to other nil rate bands, this £1million allowance cannot be transferred between spouses if not used.
Those of us who have worked in the rural sector for many years are clear that there are not many of our clients who will escape the application of these rules with the value of most farms, stock, and machinery held usually far exceeding that £1million value.
While the main rules only kick in from April 2026, any lifetime gifting from the Budget date will also be caught by the new rules provided the death occurs after April 2026.
So, where succession is important to the client, action must be taken to protect the longevity of the business and to allow it to pass to the next generation without a crippling IHT burden. While in the past some will have taken conscious decisions to retain ownership pending a transfer on death, far too often farming families have not taken active steps in relation to succession planning where the existing IHT rules provided cover for those who did not plan ahead.
If farms and estates are to be protected going forward, it is no longer an option to do nothing. Many will have to enter this brave new world which they perhaps previously sought to avoid.
There are various steps which can be taken to mitigate the IHT burden. Any discussions must start with a fact-finding exercise as to the structure of current ownership, valuation of the assets retained, and a decision as to who is to be the successor(s) to the business.
Professional advisors in the rural sector are looking at new ways and new considerations to deal with these new challenges.
Lifetime gifting will become a much more important part of succession planning. The challenge will be to find the right time to complete gifting to ensure the donor has a high likelihood of survival for the 7 years following the death but is of an age where the associated reduction in income (to avoid challenges under the Gift With Reservation of Benefit rules) in the hands of the donor is acceptable. We would expect that the new taxation rules on Pensions will result in pension holders drawing more income from their pension which can perhaps go some way towards compensation for loss of income as a result of gifting of the farming business interests.
Life insurance will also play a large role – both to provide cover for payment of IHT for the younger generations, and to cover the 7-year period for any lifetime gifting by the older generations.
Consideration will also need to be given as to the splitting of ownership. Should ownership be split between spouses and next generations and their spouses early on, to allow use of multiple £1million allowances? That will not always be a comfortable decision, and the use of pre-nuptial and post-nuptial agreements is likely to become more widespread as a result.
Those farming clients who hold an interest in a fully protected 1991 Act tenancy would appear to be somewhat better off under the new IHT rules. Those type of tenancies are usually tenancies which run from year to year under tacit relocation which remain subject to section 177 of the Inheritance Act 1984. Section 177 allows for the value of the tenancy itself to be left out of account in ascertaining the value of a deceased's estate provided certain ownership conditions are met in relation to the tenancy interest. It's important to note here that the exclusion of value will not apply to any tenant's improvements which will fully become subject to IHT under the new rules.
We of course still await the full details of the new legislation but would encourage all those potentially affected to make a start on some of the groundwork for their succession planning discussions in early course.
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.
