Good news for farmers but succession planning remains important

Just before Christmas there was finally some good news for farmers.  The £1 million cap introduced in the 2024 Budget to limit the amount of assets able to attract full relief for agricultural or business relief for inheritance tax was extended so each individual will now benefit from an increased cap of £2.5 million.  The cap is effective from 6 April 2026.  It had already been announced in the 2025 Budget that the cap may now also be transferred between spouses or civil partners if unused on the first death, even if the first spouse did not own qualifying assets.  Therefore, married couples may now have available a combined cap of £5 million of qualifying assets that will be able to attract 100% relief with the remaining qualifying assets subject to 50% relief.

This is undoubtedly good news for farmers and business owners.  The tax saving amounts to £300,000 for the extra £1.5 million added to the cap for an individual and £600,000 for a couple.

The increased cap may mean many farming business are again fully covered by agricultural and business relief.  However, given the reliefs are still restricted it is worth taking the time to understand what the value of the farming business truly is.

The importance of properly valuing farming assets

Traditionally, valuations of farming businesses on death or on making a gift in lifetime of the farmer focused almost exclusively on the value of the farmland.  There was very little attention paid to the value of say a dairy herd, a crop ready to be harvested or the contract in place supplying the supermarket with potatoes. These would all normally attract relief in full and with no inheritance tax at stake there was little reason to consider them.

Going forward this is going to change. Every aspect of a farming business (or any other trading business) will need to be fully considered and valued to be able to apply the cap to the total value reached.  This is going to mean there are significant fluctuations in value depending on the time of year the death or gift occurs.  If a gift during lifetime is being considered timing of the gift will be particularly relevant.

Since the original cap was announced, we have been advising farmers to take stock.  In order to understand the potential inheritance tax liability it is necessary to properly understand what there is, who owns it and the market value – not the value written in the accounts.

Establishing ownership of farming assets

It is surprising how many people believe ownership of the land is in their name personally or perhaps owned by the farming partnership but legally it may not be so.  This needs to be established to correctly identify the value of the business within their estate and what rate of relief is available to it.  For example, land owned by an individual partner but used by a farming partnership would not qualify for 100% business relief.

Given the need going forward to value all aspects of the business it is also sensible to give thought to a full inventory of assets and liabilities in the business whilst the farmer is still able to help assist in this process.

If lifetime gifting is being considered to spread the value of a business among the family, it is necessary to understand that what is to be given is in that person’s power to give and what the impact is of that gift.  This is from both a tax perspective and cash flow for the person making the gift.

With the increase in the cap it is also worth considering which assets would only be able to achieve 50% relief in any case.  Actions may be taken to increase the relief to 100% to make use of the increased cap value This may include a surrender and regrant of a tenancy where there is an AHA tenancy where agricultural relief may be limited to 50% or transferring land  to the partnership which, as mentioned above, would be limited to 50% business relief where an individual partner owns land which is used in the partnership.  However, careful consideration needs to be given in each case to consider the issues and other potential tax liabilities.

Ensuring legal documents are kept up to date

Alongside understanding what there is, its value and who actually owns it, it is also vitally important to check that the correct documents are in place to be able to manage the business now and in the future.  Ensure there are partnership agreements, shareholders agreement, wills and power of attorney that are still fit for purpose.  These documents can easily become outdated, for example when the younger generation join the partnership.  It is good practice to review documents every time a major change takes place and in any case every few years.  Having well drafted documents in place, that dovetail with each other, can prevent a lot of trouble later on.  This may be because a dispute arises between the partners in a business, between family members as to who should receive what or trying to prove to HMRC how assets are owned and therefore which reliefs may be available.

Time and money spent getting these documents right now, and keeping them up to date in the future, is worthwhile to prevent far more time and money being spent when they are relied on if they are not fit for purpose and up to date with what is actually happening in the business.

Our agricultural lawyers have helped generations of farmers pass on their family farms in the way that best suits their individual situation. Please get in touch if we can help.