Despite significant pressure from the farming community and professional bodies, the government is showing no sign of backtracking on its budget announcements.
Chris Solt, agricultural partner at Lovewell Blake, says that his team has already received a flood of calls from worried family farmers wanting to discuss how they can mitigate the effects of Rachel Reeves’ announcement – with handing over to the next generation early enough to take advantage of exempt lifetime gifts high on the list of priorities.
“Once the initial shock and dismay at the restriction of APR started to abate, many people facing increased inheritance tax liabilities have begun to think about what they can do to ensure the family farm stays intact,” said Mr Solt.
“There are some immediate measures which can be taken, including married couples ensuring that each spouse holds at least £1 million worth of assets in the farm and that on the first death that share passes to the next generation and not to the surviving spouse. By doing this, and using full nil-rate bands and residential nil-rate bands, potentially a farm worth up to £3 million could eventually be passed on with no inheritance tax to pay.
“But the most effective way of avoiding an inheritance tax liability is to take advantage of the exempt gifts rule, whereby business assets can be passed down to the next generation free of IHT provided the donor lives for seven years from the date of the gift. The recipient will miss out on the capital gains tax uplift on death but, this may be a small price to pay.
“It is possible to take out life assurance to cover any potential tax bill should the donor die within the seven year period, but the most effective way of using this method is not to wait until the donor is already of retirement age. This is why better and earlier succession planning is now vital.”
Mr Solt says that such a move could bring other benefits to the agricultural sector.
“In many cases, family farms have traditionally not passed down until the older generation are well into retirement age, which often means the next generation doesn’t take over until they themselves are in middle age or older. This has resulted in some children exiting farming altogether, frustrated that their opportunity to run the farm will come too late in life.
“If we see succession happening earlier – as it is going to have to in order to take advantage of exempt gifts – then this could also mean a younger generation with new ideas bringing innovation and renewed energy into farming.”