Business Clinic: Should we undo inheritance plans?

Whether it’s a legal, tax, insurance, management or land issue, Farmers Weekly’s Business Clinic experts can help.

Here, Harriet Neusinger, a partner in Thrings’ succession and tax team, advises on the implications of the most recent government changes to inheritance tax (IHT) relief.

These increased the individual allowance attracting 100% agricultural property relief (APR) and/or business property relief (BPR) from £1m to £2.5m and confirmed that this can be transferred between spouses and civil partners. 

See also: Business Clinic: are we liable for business rates assessment?      

Q: Now that the government has announced that the individual 100% agricultural property relief (APR) and business property relief (BPR) allowance will rise to £2.5m and is transferable between spouses and civil partners, have we wasted time and expense in planning for the original proposal in the 2024 Budget, for a £1m, non-transferable allowance?

Do our wills and other documents now need to be changed again, to make use of the higher allowance and its transferability?

A: Any planning you have already undertaken following the 2024 Budget may still be beneficial, even in light of the increased allowance and ability to transfer, so consider carefully before unravelling this.

Common advice following the Autumn 2024 Budget has been to ensure farming assets are divided between spouses, so that each owns sufficient qualifying assets to utilise the individual allowances.

While the introduction of the ability to transfer the allowance makes this arguably unnecessary for tax purposes, interspousal transfers will have incurred no liability to tax (due to the spouse exemption).  

Furthermore a division of assets will likely ease the administrative process on the first death, not to mention the practical steps in allowing the business to continue while the estate is being administered.

Further advice since the 2024 Budget has been to update wills to pass the limit of qualifying assets either to a trust, or outright to other beneficiaries (generally children), on the first death.

A trust offers ongoing flexibility for the surviving spouse as they can also be a beneficiary, securing the relief while also ensuring they remain able to use and benefit from the assets.

Due to the flexible nature of such arrangements, the trust can be wound up if there are no longer any tax or other advantages in its retention.

There are, however, other potential benefits in redirecting assets away from the surviving spouse which should be considered, before such steps are taken.

Capturing relief on the first death

Redistribution would result in relief on the assets being essentially “banked” on the first death, such that it is not required to be re-tested on the death of the survivor.

The relief is therefore not exposed to any potential further legislation changes, including amendments to the extent of reliefs available, or to the qualifying eligibility criteria.

Even if no such legislative changes are made, relief may be denied if the nature or use of the assets varies in the intervening period. 

The increase in the APR/BPR threshold to £2.5m now of course allows a greater amount of the relief to be captured.  

Co-ownership discount

If assets are co-owned with anyone other than a spouse, then a co-ownership discount should apply to the value of those assets when this is assessed for IHT purposes.

For example, if the assets are co-owned with children or trustees of a trust created in the will of the first spouse to die, then a discount will apply to the value of the surviving spouse’s share of these assets.

This is generally 10-15% and may help with tax mitigation on any co-owned assets not qualifying for APR or BPR on the second death (such as land with development potential, if held outside a partnership).

Residence nil rate band 

A further consideration is that the redirection of assets may help in suppressing the value of the survivor’s estate to less than £2m, therefore allowing a claim for the residence nil rate band (RNRB) within their estate.

The RNRB is an additional IHT relief allowance of £175,000 per individual (also transferable between spouses), where property is left to a “lineal descendant” – children (including step, or foster children), grandchildren, great-grandchildren, or the spouse of a lineal descendant.

This could equate to a tax saving of £140,000, if the transferable RNRB is also available. However, access to RNRB relief is reduced by £1 for every £2 where the value of an estate is higher than £2m.

If qualifying gifted assets have development potential which is exercised following their inheritance by a spouse, then any uplift in value will be assessed to tax within the survivor’s estate.

This may result in a reduction in the availability of relief and/or a greater tax liability. Redirecting the ownership of these assets to others means the uplift in value can sit with a trust, or with the next generation, allowing more opportunity for ongoing tax mitigation.

Care fees consideration

Assets which do not sit in the spouse’s estate will also be protected from an assessment for care fees, and protected in the event of the spouse’s potential remarriage.

While further changes to legislation are frustrating, particularly in consideration of the already challenging climate for farmers, the IHT moves in both Budgets have encouraged earlier succession planning conversations, which is undoubtedly positive.

Do you have a question for the panel? Outline your legal, tax, finance, insurance or farm management question in no more than 350 words and Farmers Weekly will put it to a member of the panel. Please give as much information as possible. Email your question to FW-Businessclinic@markallengroup.com using the subject line “Business Clinic”.