The new world of estate planning for farmers

The 2025 Budget may have been quieter than last year’s, but for farming families there is still plenty to think about. Now is the time to take stock, review your plans and make sure your business is structured in the most tax-efficient way for the future.

Two significant changes have however been made to the restrictions on Agricultural Relief (AR) and Business Relief (BR) which were announced in the 2024 Budget.  The most significant is the increase of the capped amount from £1 million to £2.5 million which means an individual can now receive 100% relief from inheritance tax on qualifying agricultural/business assets up to a total value of £2.5 million (with 50% relief available on the value of qualifying assets over £2.5 million).

The other change which is also significant to many is that any unused portion of £2.5 million cap will now be transferrable between spouses and civil partners. This change brings the system into line with the standard nil-rate band and the residence nil-rate band, and it’s something many advisers have long called for. We understand it will even apply to spouses who passed away many years ago, regardless of whether they ever owned agricultural or business assets.

How helpful is the transferable IHT allowance for farmers?

For farms in higher-value regions such as the South East, the practical benefit of being able to transfer the allowance between spouses may be limited. This is because it can have a knock-on effect on other parts of the tax system — particularly the Residential Nil-Rate Band (RNRB).

If a married couple or those in a civil partnership both have simple wills that leave everything to the survivor following first death, while that may seem nice and straightforward, the downside is that it then  combines everything into the survivor’s estate at the point of the second death.

Once the survivor’s estate exceeds £2 million (before applying any reliefs or exemptions, including AR or BR), the RNRB of £175,000 each — up to £350,000 for a couple — begins to taper away. For every £2 over £2 million, £1 of the RNRB is lost.

As such, passing everything to the survivor may increase the size of their estate beyond the threshold and the family may then lose some or all of the RNRB, meaning the combined IHT bill can rise sharply as a result.

Given the value of farmland and diversified rural businesses, many farming estates can easily exceed the £2 million threshold, even where cashflow is tight.

The benefits of discretionary trusts for farmers

Instead of taking the approach of each having simple wills leaving everything to each other, it may instead be beneficial to consider splitting ownership between spouses and including a discretionary trust on first death for AR / BR assets.

This not only gets around the issue related to inflating the surviving spouse’s estate and potentially losing the RNRB, it also gives you the flexibility to look at the position at the point of first death rather than trying to guess now what the situation is going to be in hopefully, many decades time.

For example:

• Do you want to bring children / grandchildren into the farming business to work with the survivor before taking over fully?
• Could you crystallise lower values existing at the time of death if there could be an increase in value on the horizon (such as development potential)?
• If you think the value of the assets owned are likely to increase faster than the value of the NRB allowances can you get them down a generation immediately?
• Could you spread the IHT that will ultimately be due over a longer period to make budgeting easier by paying some of it over 10 year instalments from first death and the remainder in 10 year instalments following second death making each payment more manageable? This also allows tax following first death to be paid on the value of assets at that time rather than on a potentially increased value by the time of second death.

The important thing is to really give proper consideration to a long-term plan so that you are able to answer questions like these.

What do farmers need to think about before April 2026?

While in general there is time for many farming businesses to consider a new approach to estate planning, there is a ‘use it or lose it’ window of opportunity for getting farms / businesses worth more than £2.5m into trust before April 2026 whilst full AR / BR is still available. Given careful planning is required here, including linking in with an accountant or valuer, any such work will need to be started sooner rather than later.

It is also worth keeping in mind that trusts that held agricultural or business assets pre-October 2024 need to be retained wherever possible as they will each have their own £2.5m allowances, whereas trusts created after this date will share the £2.5m allowance.

Once you have considered the above points, then you can turn your attention to wider estate and tax planning.

Working out your IHT liability as a farmer

A key part of this will be to sit down and have a look at what your actual tax liability is going to be post April 2026.

Unless you know what your liability is going to be, it’s quite hard to plan for it. So there needs to be a fairly accurate calculation of what the bill is going to be to work out how best to deal with it.

Part of that will include ascertaining what you actually have at the moment, which is actually surprisingly difficult. You’d be  amazed at the amount of clients we see that think something is owned one way and it turns out that legally it’s owned a completely different way .

Once you have worked out what sort of tax figure you might be looking at, you can then implement a plan for how that’s going to either be mitigated or be paid. This could involve gifting, bringing the next generation in, or trying to set aside a slush fund so that there’s money available to pay the tax liability. Life assurance may also play a part in funding the tax liability.

What is the right business structure for your farm?

Is the business structure that you’ve got at the moment the correct one or should you be considering alternatives, be it traditional partnerships, LLPs, companies or a combination? Your accountant should be able to offer advice here and work with you to see if there a better way of achieving what you want in the future in the most tax efficient way, balancing the changes that are coming down the line with other considerations such as income tax.

As part of this review, you should also look at any business documents you’ve got. If you’re already running as a partnership, what does your partnership agreement actually say? Does it cover things like what will happen on death and bringing in the next generation? Does it properly set out who owns what?

That might include things like if you’ve got unregistered land, considering a voluntary first registration so that you, the person that has the knowledge about the land, is there to help with that registration process, making sure it goes into the correct names.

Something that can work really well is sitting down with all your advisers – for example your accountants, land agents and your lawyers, to try and flesh out what you’ve got, what it’s worth, what your plans are for the future, and then how best to go about actually activating those plans to make sure they work in the most tax efficient way possible.

Do not forget lasting power of attorneys

We always talk about wills because wills are a great way of doing estate planning, but Lasting Power of Attorneys (LPAs) are just as important. If you were to lose capacity without LPAs in place, it can be a real problem, especially for managing business accounts,  and especially if there’s only one signatory on the business account. How do you pay for feed supplies for example if you’ve got one person managing the account and they lose capacity?

It can really, really impact the business in a huge way. So if you don’t have LPAs in place, we would strongly advise that you get both business and personal ones arranged.

Every farm and every farming family is different and so there is no ‘one size fits all approach’. What is key is that you start thinking about these issues now, so that you can develop a plan that works for your circumstances. Our lawyers have advised generations of farming families, helping them to do exactly that and would be more than happy to help.