Budget reforms pose tax challenges for farming families

There has been a huge backlash from the farming community in the wake of the recently announced Budget, with the president of the National Farmers’ Union (NFU) stating the level of anger among members was ‘like I’ve never experienced before’.

Such discontent in the farming community has been stoked as a result of sudden changes to Agricultural Property Relief and Business Property Relief, both of which have been used by farmers in the past to pass their farms to their descendants virtually tax free, without restriction in terms of the value of the farm. 

The situation prior

Historically, Agricultural Property Relief relieved 100% of the agricultural land from inheritance tax. It did not always relieve the full value of the farmhouse, unless it was actively used to manage the farmland and was proportionate in size, but the Residence Nil Rate band (currently a relief on the value of a home worth £175,000) could mitigate the inheritance tax on the value of the farmhouse, if it did not qualify for Agricultural Property Relief.

Any land not used for agriculture but used for a business purpose, such as for shooting, could qualify for Business Property Relief at potentially 100% of its market value. If the land satisfied the tests for both Agricultural Property Relief and Business Property Relief, Agricultural Relief would take priority.

However, following the recently announced changes to such relief, farmers are threatening to take matters into their own hands and mount disruptive action. It is clear to see why this is the case.

The situation now

Under the new proposals in the Budget, the value of farming assets qualifying for Agricultural Property Relief and Business Property Relief will be aggregated and capped at £1 million per farmer. Anything above this cap will be taxed at 20%, half the inheritance tax rate of 40%.

Unless advice is taken at an early stage, this could lead to farms over this cap being sold to pay the inheritance tax. This may have a huge impact on the UK’s food security as larger farms are split up to pay inheritance tax. Economies of scale in our farming industry may also be lost, causing food prices to skyrocket.

For couples who own a farm together, this would be a 100% relief of £1 million each, not transferable between spouses or civil partners on death. Therefore, to preserve their reliefs, farming couples will be forced to pass their share of the farm to their children and not to each other.

The challenges

This may lead to all sorts of complications. 

Firstly, it is important to consider what happens if part of the farm now belongs to a child who is not interested in farming and wants to sell, or they are getting divorced. Will your farm be part of their divorce settlement? There are also questions as to whether the surviving farmer would be able to prevent a sale.

In such cases, children may have to enter cohabitation agreements, pre-nup and post-nups to ensure that farming assets are ring fenced before the farmer either gifts a proportion of the farm pre-death to avoid inheritance tax or via their will post-death to preserve their £1 million cap. These are just a few of the critical issues which the Budget has thrown up and now need to be considered by farming communities in order to preserve their estates and retain control over their farms.

Possible solutions

However, there are several solutions which may provide some solace to these communities.

Importantly, if farmland has not increased in value very much since it was acquired, farmers can consider gifting land, which takes the farm over its cap for full inheritance tax relief. This would be a deemed disposal for capital gains tax. 

As many farms are held by family companies, it may also be possible to undertake tax planning via shares. It is possible to freeze the value of the parent’s shareholding and to create a new form of shareholding called growth shares, which are gifted to children with virtually no capital gains tax or inheritance implications, thereby mitigating the parent’s inheritance tax exposure.

If the farm is in the name of one spouse only, they may also consider gifting half to the other spouse or civil partner to get the additional £1 million tax relief.

Conclusion

Overall, this Budget poses a number of complex issues for farmers to navigate as, should they be unable to pay the inheritance tax, farming families will likely be forced to sell parts of the farm. Families may therefore have to go into partnership with their children to mitigate tax exposure and keep a hold on their farms, many of which have been passed down through the family for generations.

Seeking tailored legal advice is only going to become more essential as a result of the Budget and farmers will likely be seeking expert advice to help them navigate this increasingly turbulent tax landscape.