IHT planning: Beware of surprise tax liabilities

A hasty move or an unexpected event can bring surprise tax liabilities and other complications when planning for the cut in inheritance tax (IHT) reliefs due to take effect from April next year.

Lawyers, accountants and other advisers are busy helping farming families restructure and warn of unintended consequences when transferring assets and changing the way the business is set up.

At Cumbria- and Newcastle-based law firm Burnetts Solicitors, agri and estates partner Richard Miller says there is a common misconception that no tax is due when gifts of property are made during lifetime.

See also: Budget highlights need for inheritance document housekeeping

Capital gains tax

“There are potential capital gains tax (CGT) liabilities on the market value of a property being gifted at the time of transfer compared with its base value [when the donor acquired the asset], unless your accountant claims  gift holdover relief on your behalf, which defers the tax until the person receiving the property then disposes of it,” he warns.

“People are giving away assets and not realising this, because they are not checking with their accountant first,” he says.

“We won’t act upon a client’s instructions and process the paperwork for a gift to be made unless we know that the accountant has been consulted.”  

Stamp duty land tax

When transferring property such as farmland which has bank debt secured against it, and the debt is also being transferred, stamp duty land tax (SDLT) may well be charged by HMRC on the value of that debt.

Some general practitioner solicitors don’t realise this, says Richard.

“Where solicitors are aware of this point, there is also a misconception the SDLT implications can be avoided by property owners entering into a declaration of trust as opposed to a full transfer.

“This is not the case and the SDLT position will still need to be assessed.”

Lengthy processes  

In some cases, banks are taking a long time to process amended loan facilities and security documents in preparation for property being transferred, says Richard.

“Clients assume that bank consent to a transfer is just a rubber stamp, when we have had examples of succession cases taking as long as 18 months to conclude.

“This is due to the complexity surrounding different scenarios, for example, when a farming business involves individuals as property owners, a trading partnership and limited companies.”

Time can be saved by making sure that everything is lined up and presented to the bank in a helpful way, says Richard.

At Burnetts, this includes checking with the firm’s banking team what is proposed by clients and their advisers before presenting it for approval.

Unforeseen events

Assumptions are dangerous, and one that is understandably frequently made is that people will die in the “natural order”, with the older generation passing first, says Richard.

“Parents might gift the land or farm to their children, but if one or more of the children dies before or soon after the parents, it is the new generation owners which then have the inheritance tax liability.

“You need to backfill that potential liability by calculating what the potential IHT liability would be if that happened, then using life [insurance] cover to not only pay any tax bill, but also for the security of any family who need to be provided for.”

Financial advisers should be consulted before succession instructions are completed, says Richard, adding that life policies should be written in trust so that any payout does not form part of a person’s estate.

Divorce risk

While the marriage rate in the UK is falling, divorce rates continue to rise.

Gifting puts assets at risk, so a pre-nuptial or post-nuptial agreement should be drawn up to make it clear what assets would be on the table in the event of a divorce or a civil partnership ending.

“We mention this at our first ‘all parties’ meeting, and it is generally received positively.

“If the choice is between taxable assets being held back by an older generation and your respective partner being gifted those assets earlier without having to worry about the tax bill landing one day in the future, entering into these types of agreement is actually a lot more palatable than people may think.

“Both parties must seek independent legal advice, all assets must be declared and there must be no duress or coercion.”

Wills  

It is still common for husband and wife (or a civil partnership) wills to mirror each other and leave everything to the respective spouse.

From April 2026, after a standard nil rate IHT band of £325,000, each individual has a combined business/agricultural property relief allowance  of £1m.

“You need to crystallise those £1m reliefs because they are not transferable between spouses,” says Richard.

He advises that the most common way to achieve this is by gifting to future generations on first death where appropriate or by incorporating a discretionary trust into the wills.