The increasing importance of inheritance tax planning for farmers

As farmers have traditionally been able to rely on agricultural and business relief in order to save inheritance tax on death, they may not be aware of other tax planning opportunities.  With the cap of £2.5 million being introduced on the total combined value of qualifying agricultural and business assets from 6 April 2026 it is worth becoming aware of other options.

Following the announcements of changes to AR and BR, draft legislation has been published which provides a more detailed view of how the changes will be applied.  Although amendments may be made to the draft legislation before it becomes law, it is important for those affected to start taking specialist advice on their options to minimise the impact of the reduction in these reliefs.

In particular, individuals could consider the following:

• Gifts into trust before 6 April 2026 as (subject to anti-forestalling provisions that need to be considered on an individual basis) this allows the assets being transferred into trust to benefit from unrestricted 100% relief if the individual survives the gift by seven years, whereas transfers into trust after that date will only benefit from 100% relief up to the £2.5 million limit and 50% thereafter
• Even though any unused proportion of the £2.5 million allowance will be transferable to a surviving spouse, ensuring any assets which qualify for the relief are owned tax efficiently between spouses.
• Making outright gifts to family members to start the clock on the seven years which need to pass before the gift is outside of the individual’s estate
• Reviewing wills to ensure they can deal with the changes in the most tax efficient way possible.

There is more detail on some of these options below.

Agricultural and business relief

Whilst from 6 April 2026, these reliefs will be capped at £2.5 million for full relief at 100% and 50% on the remaining value of qualifying assets, this is still a valuable relief.  Farmers should consider whether they are maximising this relief, for example, if a farmer is married or in a civil partnership, considering whether it is more tax efficient for both spouses or civil partners to own qualifying assets even though any unused proportion of the £2.5 million allowance will be transferable to a surviving spouse.

Nil rate bands

Each person has a nil rate band of £325,000 which is able to be set against the value of their estate on death, unless they have made lifetime gifts which has used up their nil rate band.  If available, the first £325,000 of value in the estate passes free of inheritance tax.

In addition, if they have been married or in a civil partnership and their partner has previously died, the survivor’s estate may benefit from the nil rate band of their partner if unused, either in lifetime or on death.  This means potentially a further £325,000 may pass free of inheritance tax.

Many farmers will live in a farmhouse, which even under the current rules, would not attract full AR as the market value of the house is likely to be greater than its agricultural value.  Where a residence passes to a “lineal descendent” such as a child or grandchild (although the class is quite wide) there is a residence nil rate band available of £175,000.  As with the nil rate band referred to above, a surviving spouse or civil partner’s estate may also benefit from their partner’s unused residence nil rate band.  However, the residence nil rate band is restricted by the value of the deceased’s estate.

Where the estate has a value, before any reliefs or exemptions, of over £2million the amount of residence nil rate begins to taper by £1 for every £2 over £2million until there is no benefit.

Many farmers will have estates worth more than £2million due to land values.  This can make the option of making lifetime gifts more attractive to reduce the value of their estate on death.  As we will see below, lifetime gifts may need to be brought back into the net for calculating inheritance tax but provided the gift has been completed prior to death it will be the estate value after lifetime gifts which is relevant when considering the residence nil rate band.

Lifetime gifts

There are various exemptions that apply to lifetime gifting, some of which are quite restricted in their value.  A person may give away gifts without any impact on their nil rate band or bringing the gifts back into account for inheritance tax such as:

• “Small gifts” of up to a total of £250 to one person in any tax year but to any number of people
• The annual allowance of £3,000 (cannot be combined with the small gift allowance)
• Gifts on marriage which vary in amount depending on the relationship
• Gifts out of surplus income where there is excess income after taking into account normal expenditure.

More significant gifts must be survived by seven years for them not to be brought back into account on death.  This may increase to 14 years where trusts are involved.  Therefore, where there are assets which are available to be given away, the sooner the gift is made the better to increase the chances of surviving the required period.

Gifting does not just cover cash but can include gifts of land or a share of a partnership, for example.  In order for a gift to be effective, the person making the gift must not retain a benefit.

Some gifts would need the advice of an independent financial advisor as they may involve investments or insurance backed products.

Anti-forestalling measures

Many farmers are considering lifetime gifts as a way of trying to ensure their farm can remain in the family without large inheritance tax liabilities arising on death.

Although this is a viable option and should certainly be considered, when considering making gifts you should be aware that any gifts made on or after 30 October 2024 will be subject to anti-forestalling rules, which mean if the donor dies within 7 years of making the gift and that death is on or after 6 April 2026 the new rules will apply to the gift.  This means that if the gift is worth more than £2.5 million inheritance tax will be payable on death.

Any trusts created post-30 October 2024 by one donor will share an AR/BR £2.5 million allowance between them rather than each qualifying for an allowance.

Advice should be taken not only on the tax planning options available for multi generational gifting but also practical considerations such as how to deal with future decision making, potential marriage breakdowns and the consequences of death in the ”wrong” order.

The above is an overview and specific advice for your particular circumstances should be taken. If you have any questions, please get in touch.