Thorne Widgery, Herefordshire’s largest independent agricultural accountants, explains how upcoming Inheritance Tax changes could impact family farms and what you can do to protect your legacy.
Despite waves of protests across the country, the Government seem intent on charging forward with the Inheritance Tax (IHT) reforms that will have a major impact on the agriculture industry.
The Inheritance Tax threshold is £325,000, but the threshold increases to £500,000 if you leave your home to a direct descendant. This can be paired with your spouse to create a £1,000,000 threshold. The threshold itself is not changing, it is frozen until 2030, and this is part of the problem.
Your assets are valuable, and the cost of it all adds up quickly to push you over the threshold, particularly as inflation will cause the value of assets to increase.
Unlike others who are in line for IHT, farmers tend to have limited access to financial resources, with most of their assets being essential farming equipment.
The previous provision of the Agricultural Property Relief (APR) and Business Property Relief (BPR) used to account for this disparity, but the changes have gutted this protection.
Now that the APR and BPR will only provide 100 per cent relief on the first £1 million of combined qualifying assets and 50 per cent on anything beyond that, many more farmers are at risk of paying IHT.
How will Inheritance Tax hurt farms?
Unlike with many other estates that are in line for IHT, farms very rarely have assets that are not essential to their basic operations. Given the often limited access to ready cash, those who are set to inherit farms will have to find the IHT money from somewhere.
The main place where this is going to be achieved is with the sale of farmland. As more developers seek land to build houses, some farmers may end up in the unfortunate position of sacrificing some of their land to developers just to cover the IHT bill.
The alternative will be selling off other assets in the form of animals or farming equipment. This would destabilise a farm’s ability to function and thus leave the new owners of the farm in a perilous position.
When you consider that the people navigating these challenges will be families who have just lost a loved one, the prospect of further loss seems callous.
Consolidations are already happening throughout the agricultural sector as it becomes increasingly difficult for family farms to stand in the face of bigger enterprises.
It is expected that we will see a further reduction in the viability of family farms unless the changes to IHT can be successfully mitigated. This risks forever changing the face of the countryside as we know it.
How to protect against Inheritance Tax?
Smart, long-term planning is vital to ensure that you have the best chance of reducing your IHT bill to a reasonable amount. Conducting regular evaluations of your assets will allow you to know what is likely to push you over the edge when the time comes for your IHT to be calculated.
As ever, the best way to circumvent IHT is by gifting assets to your loved ones while you are still alive. Gifts to spouses are entirely exempt from IHT considerations, but this may only be a short-term fix if your spouse is of a comparable age to yourself.
There is an annual IHT gift allowance of £3,000, which will protect gifts of that size from being considered for IHT. Obviously, it would take quite some time to transfer all your assets if you can only gift them £3,000 at a time. There is a seven-year rule concerning gifts that may be more aligned with your needs. Only gifts given in the seven years preceding your death will be considered for IHT.
While we do not claim to have some way of determining the exact year of your death and thus inform you when exactly to gift all of your assets, the exemption is worth exploring regardless.
As your family becomes more invested in the farm, gifting them vital assets could be a rite of passage that gives them a greater sense of responsibility and you a smaller IHT bill. Prioritising which assets you gift and in which order will mitigate the overall IHT bill.
You will likely need to update ahead of the new changes.
With the changes in mind, you can consider how best to divide your assets and what steps can be taken to ensure that you retain as much control over your finances as possible.
Utilising trust funds or other financial structures might be worth considering if you are worried that it may be too late to utilise some of the other avenues discussed here.
Planning for your future
However, these can be challenging to engage with and should only be done so after seeking professional financial advice. The best thing that you can do in this current situation is to start planning for your future now, in the hope that you will retain as much control as possible and ensure your legacy is preserved.
Start planning now with expert guidance from Thorne Widgery to protect your farm, minimise Inheritance Tax, and secure your family’s future – call 01432 276393 to speak with their team today.