Succession and tax strategy for farmers and business owners post-Budget

The Chancellor’s Budget last week caused understandable concern and surprise throughout the agricultural and business sectors.  A consultation has been announced for early 2025, where further details should emerge, particularly on the application of the changes to trusts.  It should also present opportunity for industry bodies to provide feedback on the reforms and it is possible that we may see some changes before the final legislation.

Time will also enable the full repercussions of the changes to be more fully considered.  However, here are some thoughts on what inheritance tax (IHT) strategy for Landed Estates might look like under the new regime.

Although amongst tax advisers, the phrase “the tax tail should not wag the dog” is a favoured one, nonetheless tax policy undeniably shapes behaviours – indeed this is often a central part of tax policy, to incentivise, or disincentivise certain practices.  Therefore, it is helpful to consider what strategy has been common to date:

• Under current legislation, there is no tax benefit to making gifts during lifetime of business or agricultural assets.  Indeed, there has been a capital gains tax benefit to holding them until death.  On death, the assets have passed relieved from IHT, and rebased (ie all historic gains wiped out) for capital gains tax (CGT) purposes.  This double-benefit has often been criticised either as too generous, or for disincentivising lifetime gifts.
• There has also been a concerted effort to come within 100% business property relief where possible as providing the widest and most complete relief.  This has resulted in behaviours such as taking land in-hand, replacing old Agricultural Holdings Act tenancies and creating Balfour structures.

The new regime creates a significant shift in these dynamics.  This is best illustrated by looking at the possible IHT outcomes of three options:

1. Holding assets until death will now result in an effective inheritance charge of 20% on business or agricultural assets over £1m.  Business property relief will continue to be the more comprehensive or attractive relief, for a number of reasons.  Assets will continue to be rebased for CGT.
2. Making an outright gift during lifetime will result in the same outcome as the treatment on death if the donor dies within seven years (although tapering of the tax after three years remains).  However, if the donor survives seven years, there will be no IHT.  Capital gains can often be heldover on gifts of agricultural and business assets, meaning that although the gains remain capable of being brought into charge at a future date, no charge is triggered on the gift itself.
3. Making a gift into trust during lifetime will result in an upfront effective IHT charge of 10% on business or agricultural assets over £1m.  Any gains can be heldover.  If the donor survives the gift by seven years, no further IHT will become due.  If they die within seven years, another 10% IHT will be due on the value in excess over £1m, making the end result the same as under scenario 1.

Clearly, then, farmers and business owners are now incentivised to make lifetime gifts as the potential prize should they survive seven years is much better than paying 20% on the value over £1m should they continue to own the assets until death.  Outright gifts are most attractive as this should avoid IHT altogether if the gift is survived by seven years.  Trusts for these assets will become less attractive, with (after April 2026, subject to what the consultation proposes) a 10% entry charge for those who want to benefit from the longer-term protection offered by trusts (which are well suited to holding multi-generational assets), as well as an effective 3% charge every 10 years on agricultural and business assets.  Life assurance, particularly term policies to cover gifts, is likely to have a growing role in IHT strategy.  Giving will only work for IHT purposes where you can afford not to retain any benefit in the asset given away; hence much of the concern about the impact on smaller and medium sized farms and businesses, where this will be more difficult.

Under the new regime, there are going to be a lot of conversations about succession.  Whereas to date, it has not been a priority to hand-on relieved assets, now it is likely to be a regular agenda item.  The sensitivities of these conversations, given family dynamics and the emotional and financial importance of these core assets, will mean this (potentially recurring agenda items) will need to be approached with care.   Clearly one does not want to give away assets to avoid tax but introduce other forms of risk into the equation.

Whilst these are significant changes, important reliefs and exemptions remain.  Key tax benefits remain such as the spouse exemption, CGT uplift on death, potentially exempt transfer gift regime and holdover from CGT have remained.  As discussed in previous posts, Balfour structures will continue to have a role, and new strategies will develop for mitigating IHT on assets which, for whatever reason, are held until death.  However, it is clear that the Budget has shifted the perspective for tax and succession planning on Landed Estates.