The recent Budget announced on 30 October 2024, brings significant changes to Inheritance Tax (IHT) reliefs that could impact the future of farming businesses. Find out what you need to consider as part of your succession planning.
The Budget announced by the Chancellor on 30 October 2024 includes substantial changes to the Inheritance Tax (IHT) reliefs available to farmers throughout Scotland.
We know many farming families will be concerned as to the effect this may have on the future of their farming business, particularly in those businesses where there is little spare cash available or perhaps a shortage of assets which could be sold without much impact to raise funds due to pay IHT.
The main changes affecting succession planning for farmers relate to the availability of Agricultural Property Relief (APR) and Business Property Relief (BPR) on death and lifetime gifts.
While previously many farms and farm businesses could rely on APR and BPR to reduce their liability to IHT to near Nil, that relief has now been restricted to an allowance of £1 million per person where 100% relief under APR and BPR would continue to be available.
Thereafter, the balance of the value held will still qualify for 50% relief, resulting in an effective IHT rate of 20%.
As opposed to the existing Nil Rate Band reliefs, it would appear that this £1 million allowance will not be transferable between spouses if not used on the first death.
In addition, Trusts settled after the Budget will share in that personal allowance – thus removing a potential route to securing additional IHT allowances on assets.
The reality is that most farming businesses will own land and buildings, stock, machinery and partnership interests which far exceed that £1 million threshold, even where the assets are held between two or more partners in a business.
The value of agricultural tenancies held will also need to be considered and taken into account. As such, unless careful planning takes place, many will now face an IHT burden on death.
The £1 million allowance will also include any lifetime gifts made from the date of the budget, although these gifts will still disappear from your estate if you survive for seven years from the date of the gift and as such escape IHT.
In addition to the restriction on the availability of APR and BPR, we have seen changes to how pension funds will be dealt with under IHT.
Previously, pension funds were often used as a fund transferable outwith IHT which could benefit those family members who would not benefit from the farming assets going forward.
Under the new rules, unspent pension funds will form part of a deceased's estate on death and become subject to IHT. It is not clear at present how that will interact with other available IHT reliefs and allowances.
We expect that the new rules will result in more lifetime transfers of farms and farm assets, perhaps at a much earlier age than what we have been used to.
Life insurance policies to protect from IHT liability are also expected to play a more dominant role.
There is no doubt that the new rules will force a different approach to succession planning – with a focus on using available reliefs and allowances where possible.
There may have been a bit of a laid-back approach to succession planning in the rural sector in the past, with many relying heavily on the tax reliefs available.
To protect businesses going forward that will need to change.
More detailed information on the new rules will follow early in the new year and we suggest that the time between now and then is taken to reflect on assets held, consider valuations and have discussions with family members about a way forward.
This will need to go hand-in-hand with detailed advice from your solicitors and accountants to allow you and your team of professional advisors to forge a way through these new challenges.
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.
