Farmers protesting in London
Farming families are outraged at recent changes in the budget, but there is help at hand, says JAMES MacKINNON
Changes to inheritance tax (IHT) rules for farmers, announced as part of the UK Budget last month, have caused consternation within the agricultural community, even generating national headlines as farmers have voiced their concerns at Westminster.
Exemptions from IHT for agricultural land and business owners were first introduced under the 1984 Inheritance Tax Act in the form of agricultural and business property relief.
The matter of capping these reliefs has been on the annual Budget agenda for decades, but no government has acted on this until now.
In theory, the Treasury’s decision to cap the relief at £1 million means farmers will be exposed to IHT on any land or other assets above that value. Despite this being at a reduced rate of 20% – half the standard rate of IHT for non-agricultural assets – many are naturally still concerned about the potential impact on theirs and their families’ finances.
Just how many farms in Scotland will be affected by the changes is unclear, but Scotland’s average farm net worth in 2023 was £1.81 million, so many will be wondering whether the changes apply to them.
In practice, some will be able to skirt the £1 million cap; because it is applied on an individual basis, a farming family made up of two spouses and their children, for example, could avail of £3 million in allowances tax free.
It is for precisely this reason – that the impact of the changes will vary so much from one individual to the next – that it is crucial for farmers to start planning now.
Planning ahead
A farm’s value is prone to fluctuation, so any agricultural landowner should have regular valuations to provide an up-to-date sense of their estate’s value and give them an informed standpoint from which to consider their succession planning.
In Scotland, roughly two-thirds of farmers are over 55 years old, and many work on the farm into their old age, making succession planning – and bringing their children, or other eventual successors, into the business early – even more important.
It is worth noting that farmers will still have the option to gift interests in their farm in their lifetime under general gifting rules, which aren’t set to change – including that any tax liability expires if the donor survives for seven years following the gift being made; this further proves the need to plan as early as possible.
Farmers can also plan ahead by reviewing and, if appropriate, updating their wills. Wills must be structured in a particular way to ensure certain allowances can be applied; simply leaving everything to the surviving spouse is often not the most tax efficient approach.
And given a huge 64% of people in Scotland don’t have a will, any farmers who fall into that category would be well advised to remedy that to ensure that the farm is passed on in accordance with their wishes in the most tax efficient manner.
Options that may be available to mitigate a potential IHT liability include borrowing against the farm, taking out life assurance or, for those with the means, using an investment portfolio or other liquid assets.
For those whose estates are valued at significantly over £1 million, however, a level of IHT liability will likely be unavoidable. Speaking from experience, it is much better for all involved to tackle these issues early, than to wait until the time comes and a person’s family or other successors are left to navigate them.
When the reliefs were originally introduced in 1984, their purpose was to help avoid the break-up of small to medium farming businesses, many of which are family-owned and run.
In theory, these new proposed changes still provide protection for such businesses, but the impacts will vary substantially from one farm to the next, and the right approach for one won’t be right for the next. Seeking advice at the earliest opportunity, and planning ahead, are vital to minimise the potential impact of the changes on any farm.
James MacKinnon, is a private client partner at Aberdein Considine
Leave a Reply