10th February 2025

The Budget and What Next for Farming Families? – Part 2

To read part 1 of this article, press here

 

For some farming families, the mantra of passing down assets well before death has been something that they have practised for years. That continues to be attractive – if one is faced with paying an Inheritance Tax bill of say £200,000 on the second million over and above the first million of Inheritance Tax assets, there are benefits to giving that additional block of farming assets away during lifetime when it is more likely than not that one will survive 7 years.  

 

But of course, that does sidestep Inheritance Tax potentially at the expense of incurring an ‘involuntarily incurred’ Capital Gains Tax bill. This is because over the last 20 or so years the value of agricultural land and agricultural assets have increased quite significantly so the donor farmer may end up with a Capital Gains Tax bill on the gain element when they make the lifetime gift of farming assets to the next generation.

Whilst the rate of Capital Gains Tax is certainly less than the Inheritance Tax rate is, this is a voluntary CGT bill and farmers often will not be able to fund that very easily without, again, resorting to selling off part of the farm to fund that, which makes the whole action self-defeating if we are trying to keep the farm together.

But that forgets the fact that there is probably Hold-Over Relief available for Capital Gains Tax. There are two separate routes to Hold-Over Relief for the purpose of Capital Gains Tax. The first is because it is a gift of Agricultural and/or Business Property Relief assets under Section 165 of Taxation of Chargeable Gains Act 1992. To avail oneself of this, one would need to prove to HMRC’s satisfaction that the assets qualified for Agricultural Property Relief or Business Property Relief. That is much more attractive before the end of March 2026 than it is after.

But perhaps the alternative route is even better. That would be a Hold-Over Relief using a potential exempt transfer i.e. farmer transferring to a Family Trust, their Agricultural Property Relief attracting assets. Ideally, one would test that by taking a figure slightly in excess of £325,000 worth of Agricultural Property assets in real world terms and transferring that into Trust with a claim for Agricultural Property Relief. If, say, assets of £350,000 were transferred in, that would mean, in the very worst-case scenario, that Inheritance Tax at the 20% rate was potentially charged on the last £25,000 worth of value going into Trust.

But if the Revenue agreed that Agricultural Property Relief was indeed permitted, then there would be no such Inheritance Tax bill, and one would know that one could transfer similar transfers into Trust before the end of March 2026 safe in the knowledge that Agricultural Property Relief was a given outcome.

Many people justifiably do not particularly like Trusts because of the compliance, the complexity and the adverse Income and CGT impacts that Trusts bring with them. But having secured Hold-Over Relief going into Trust, there is nothing to stop the farming family from then transferring the same assets out of the Trust, to the ultimate recipient(s) with a further CGT Hold-Over Election in place.

This then dispenses with having to have Trusts owning farming assets for any significant time.

 

There are a couple of warning notes, however, with such planning. The first is one of affordability – if you are going to end up as a farming family with parents having divested themselves of some of the farming assets in favor of the next generation, then there needs to be enough income for the parnets to survive without that income that otherwise would have come from the farming assets which they no longer own. In some cases that may be relatively easy to show, but in other cases, it will not be easy to show because it is simply not true. So, for some farming families, the solution may not be available because the outcome that it gets them to, is simply not sustainable.

The solution is also only really viable if one ends up with the land being owned by people who are not going to be made bankrupt and are not going to be the subject of any divorce etc.

The next generation landowners do need to want to farm, and it may be the case that they have to enter farming arrangements. That might take the form of family Farming Partnerships, or it may take the face of contract farming. But it will necessitate there being documentation in place, as it is very unlikely that the old school grazing licenses will be sufficient in this brave new world.

This does presuppose that there is, indeed, that wish within the family to continue farming beyond the current generation; if that does not exist and is not held by all participants, then it may well be the case that in fact a sale on death of the older generation may be in the best interests of the family as a whole at that point in time.

This is very much the sort of area where the farmer, their Accountant and their Legal Advisor will need to have a three-way conversation. I suggest that that conversation should take place in the early part of 2025 whilst there is still time to carry out planning under ‘the old regime’ before we find ourselves in the new regime, with far less scope for any proactive planning at that point in time.

For further information please contact Edward Walter of 01892 502 320 or email him at ewalter@bussmurton.co.uk.

Edward Walter

Edward Walter
Partner