Nearly two years after the changes were first announced in the 2024 Budget, I have been reflecting on their implications for inheritance tax planning and business succession, particularly following a conversation with a client...
Like many farmers, T has most of his wealth tied up in the farm; which he runs with his niece and her mother. We reviewed his position and T owns just over £5m of potentially relievable property. T has never been married and does not have children.
How much of T’s estate could qualify for 100% relief?
If T were married, or if he were a widower whose spouse or civil partner had died before 6 April 2026, up to £5m could qualify for relief at 100%, covering most of those assets. As neither applies, T is limited to £2.5m of relief at 100%.
How might an IHT charge affect the farm in this scenario?
It may be tempting to assume that an estate worth more than £5m can readily absorb an IHT charge. However, that overlooks the practical reality. The value is tied up in capital used by the business so it may not be easy to turn that value into cash.
If T’s estate has to fund an IHT bill, the business is likely to feel the impact and strain, and in terms of the wider effect, several benefits to the economy and community are arguably put at risk, such as: the business contributes to our food security; it helps to look after the environment; it aims to employ people (who pay tax); it buys services and supplies from other businesses, and generates wider economic activity and further tax receipts.
This is a common problem for family-owned and owner-managed businesses, but farming is notably exposed because returns on capital are often low. In short, there may be little spare cash to pay an IHT bill, even where the tax can be paid interest-free over ten years.
Can T claim the Residence Nil Rate Band?
No. The Residence Nil Rate Band (RNRB) is not available because T does not have children, including stepchildren. In my experience, many farmers do not benefit from the RNRB because it is tapered where the estate, before reliefs, is worth more than £2m.
Could lifetime gifting reduce the IHT exposure? Are there reliefs between partners?
Potentially. T can make gifts during his lifetime to reduce the value of his estate, but there is no partner-specific relief either during lifetime or on death. If he wants to reduce the IHT burden for the benefit of the farm and his beneficiaries, lifetime gifts are therefore likely to form part of the discussion.
The trade-off is Capital Gains Tax (CGT). Because gifts are treated as taking place at market value for CGT purposes, T may need to claim hold-over relief to avoid an immediate CGT bill. No CGT is paid at that point, but the beneficiary inherits T’s base value and other allowable expenditure, so a later sale may produce a larger gain and a higher tax charge. That may be less of a concern if the asset is expected to be retained. T’s circumstances may create a greater need to make gifts, leaving him in a less advantageous position than someone who is married or widowed.
What role might trusts play?
Trusts remain a useful IHT and estate-planning tool, particularly where asset protection and control are important. Provided the person making the gift survives for seven years, the value of the asset settled into trust can fall outside their estate.
Trusts do tend to involve additional cost and administration (when compared with absolute gifts), some of which can be mitigated. A trust with a tax liability must submit a tax return, and most trusts must be registered with the Trust Registration Service, which needs to be kept up to date. Certain actions, such as appointments of capital, will typically need to be completed by deed. Trustees must also hold meetings, prepare accounts and maintain appropriate records.
Discretionary trusts are commonly used in this type of tax and estate planning. They fall within the relevant property regime and are therefore subject to ten-year anniversary charges, with a potential IHT charge of up to 6%.
Whilst this may seem like a disadvantage, several ten-year cycles would need to pass before the cumulative charge approached an individual’s 40% rate, and even so the IHT liability is spread over time. The introduction of the £2.5m “Allowance” has made the trust IHT regime more complex. Trusts of this kind have their own Allowance, but it may be apportioned and, importantly, only one trust Allowance is available, it does not refresh after seven years.
How important are timing and life expectancy?
This can be crucial. Generally speaking, an 80-year-old is less likely to survive for seven years than a 70-year-old, although age is not the only factor. Health and other personal factors will also be relevant. Farming can be physically demanding and, at times, dangerous, but individual circumstances should be considered carefully and appropriate specialist advice taken where needed.
The timing of the changes means that some people have more opportunity to react and plan than others, simply because of their age and circumstances.
Why does bringing assets onto the balance sheet matter?
An important planning opportunity may lie in the partnership, particularly in bringing land capital into it. However, because T and his partners are not “connected” for the purposes of the SDLT legislation, there is a high risk that bringing assets onto the balance sheet for IHT purposes would trigger an SDLT charge, which can feel particularly punitive as that is unlikely to be the case in a lineal partnership.
Why does it matter? In short, it matters for Business Property Relief (BPR). Land and buildings held off balance sheet may qualify for BPR at only 50%. This can be especially important for assets with non-agricultural value, including diversified assets, and assets with hope or amenity value.
Are there any notable issues for married couples and civil partners?
Yes. The Allowance is complex and offers limited flexibility on the first death because it applies across all relievable assets. If a couple has more than £2.5m of relievable property and wants some assets to pass to the next generation and others to the surviving spouse or civil partner, an IHT charge may be difficult to avoid. This is because part of the £2.5m Allowance attaches to assets passing to the spouse or civil partner, even though that transfer is itself exempt.
What is the key takeaway?
T’s circumstances are specific, but they illustrate the capital tax challenges facing many farming and family-owned businesses seeking to pass assets to the next generation tax-efficiently. Reliefs, lifetime gifts and trusts can all form part of an effective succession strategy. However, cash flow, business continuity and legislative change must remain central considerations. What appears on paper to be a valuable estate may, in practice, be a working business with limited liquid funds available to meet an IHT liability.
Our Private Client team advises farming families and owner-managed businesses on IHT, succession planning and the transfer of business assets. Please contact us if you would like to discuss how these issues may affect you.