Will reviews: Advice for farmers on priorities and pitfalls

It’s always been good advice to make a will, but the changes coming next April to agricultural and business property relief from inheritance tax (IHT) mean most wills and plans need to be reviewed.

While acknowledging that all personal circumstances are different, lawyer Richard Miller advises that a priority for married couples and those in a civil partnership is to review their current asset ownership.

Where it is not already the case, each party is able to make use of their £1m that is eligible for 100% relief from inheritance tax under agricultural property relief (APR) or business property relief (BPR).

See also: Budget highlights need for inheritance document housekeeping

“Most wills will have been drafted historically on the basis of each person leaving everything to their respective spouse in the first instance, but it’s urgent that in these cases, the wills are amended so as to avoid increasing the value of the survivor’s estate beyond the £1m limit of APR.

Each spouse must make use of their £1m of relief on death as it is not transferable, that is, the surviving spouse doesn’t receive £2m worth of relief,” says Richard, who is chairman of law firm Burnetts and co-head of its Agri & Estates team.

“This is the case even if the broader succession plan for a farming business has not been decided and needs to be looked at as a priority for all cases involving parties who are married or in a civil partnership.”

Lifetime giving incentive

The changes to APR and BPR make passing on assets during lifetime the more tax efficient option in most cases, in contrast to the current regime which for many years has incentivised gifts on death.

“Farming businesses have been forced to actively consider their succession plans and current business structures.

“These steps not only benefit the families from a tax perspective, but it can also reduce the potential for arguments after death,” says Richard.

Bank involvement needed

However, some gifts are being made hastily without proper advice and quite often without the bank being involved during initial discussions, which can scupper the plan.

“Where a bank holds security over assets, it needs to approve a proposal to move the ownership of those assets and we’ve come across quite a few cases where the bank has only been informed of the wider plan immediately prior to the transfer being made.

“There is a broad misconception that bank approval to succession plans will simply be a formality and one that can be concluded swiftly. This simply isn’t the case.”

Specific wording is important

In the haste to update wills, a lack of detail can have unintended consequences, says Richard, especially in terms of the structure of farming businesses.

It is crucial that it is clear who owns what assets and whether or not they are owned within a partnership structure, limited company or by individuals.

“It is essential that this position is clear when drafting wills to ensure that everything passes in line with a person’s intentions.

Partnership capital accounts

Each partner within a farming business will have what is known as a capital account. This is essentially the value of their interest in the farming business according to the most recent accounts.

One element of this value will be the partner’s share of accrued profits in the business, which have not been drawn. This is common in the sector where most profits are reinvested into the business.   

“When it comes to valuing the estate, technically speaking the capital account owned by a partner at death will be deemed to be part of their estate.

“Taking account of this, it is critical that gifts of capital are made into the next generation’s hands, so as to avoid someone’s estate value being inflated by what is effectively paper profit/value and not actual money that is sat in the bank.”  

Double counting risk

When having valuations carried out, beware of double counting, warns Richard.

For example, a farm may be valued at £5m, but that could include £1m worth of farm buildings, which were funded by partnership or company funds.

The danger here is that if someone’s estate was being valued for IHT purposes, the valuer could appraise the value of the farm at £5m and the district valuer (from the government’s Valuation Office Agency) could then add the deceased’s capital account/share value, which would include the buildings shown on the balance sheet.

There is a real risk of estates being over-valued in this way. 

Check life cover

In reviewing an individual’s plans, it’s fairly common for someone to have life cover but only vague knowledge of the type of cover, or who it is with, especially if it was taken out a long time ago, says Richard.

Life cover is often used to provide funds to pay an IHT bill, to pay for someone to do the work of a key person who has died, and to provide for dependents.

“We have come across instances where the life policy has not been written in trust, which means that the payout will become part of the person’s estate and so increase the IHT liability,” says Richard.

This can be addressed – an existing policy can be put in trust, but will be subject to the seven-year survival rule for IHT purposes before it fully falls outside the person’s estate.

It’s also fairly common for policies to not be on a “whole of life” basis, which can mean that once the life covered reaches a certain age, the cover is reviewed annually, and this often results in a big jump in costs which can make it difficult to continue with, says Richard.

The alternative is to put in place a whole life policy covering to the date of death.  

Prepare for will meetings

It can be very helpful and possibly reduce costs if, before meeting with your solicitor to discuss making or reviewing a will, a list of all assets with rough valuations can be drawn up.

“Think about everything,” says Richard.

“Understandably, the value of the farm will be the focus of concern on the inheritance tax front, but it’s surprising how an estate can build up in value when things like savings and inherited property are added, and it’s not unusual for these to be forgotten to start with.”

Gifts to non-farming children

Anyone whose estate is likely to fall into the IHT net and is planning to leave property or other assets, such as savings, in their will to non-farming children or other beneficiaries should consider gifting now, suggests Richard.

“Think about what you really need – do you need the asset to support your income now, because if not, you might as well give it away to the intended beneficiary so that it is out of your estate (subject to the seven-year survival rule).”

At the same time he cautions those gifting assets to think carefully about what their living expenses are now and what they are likely to be in future, so they can budget carefully and not give away too much.