The Barleymows – Succession Planning
5th Dec 2024
George, Mary and David are at the table when Henry walks in.
Mary: Just in time for a cuppa!
Henry (sits down): Think we’re all going to need something a bit stronger than that.
David: What’s wrong, Dad?
Henry: After the bombshells in the Budget, I thought I’d ask Ensors how it affects us and to look at options. With the structure of the partnership and the land ownership as it is, the changes to inheritance tax (IHT) means we could be in for a very nasty tax bill …
George groans.
Henry (reads notes): Currently all the assets utilised in the partnership have been sheltered from IHT via Agricultural Property Relief (APR) and Business Property Relief (BPR). From 6th April 2026, these will only give partial relief. An individual will get 100% relief on assets covered under APR or BPR up to £1m in value, after that, those assets only get 50% relief.
George: And again in English?
Henry: If you pass away after 5th April 2026, any assets qualifying for APR or BPR that you hold, including your share of partnership assets worth more than £1m in total, will be taxed at a rate of 20%. The same for all of us.
Mary: But the partnership farms 2,500 acres, that’s at least £20m in land value alone, not to mention all the other property and cottages, plus the value of the pigs, chickens, crops, machinery …
Henry: I asked Ensors to give me some estimated IHT liabilities under the new rules, particularly for you Dad. We worked out your current farm property and the asset value is about £6m, including your residual estate outside the farm business, this could result in IHT of around £1m.
George (jumps up): That’s at least eight years’ worth of the entire partnership’s profit, assuming we actually make a profit. Even longer given all the bloody pressures we’re under!
Mary: That’s crazy. The business has never had that level of cash, apart from when we sold that land for development.
David: Is that what we’re expected to do? Sell land to pay the IHT?
George: Henry, you said if I die after 5 April 2026 … what happens if I go before then?
Henry: The current rules apply up to that point, so the liability would likely be minimal if any.
George: Sounds like it’d be better for the IHT if I wasn’t here!
David: Don’t say that, Grandad.
George: I’ll be damned if the only way my family inherits the land we’ve farmed for six generations, is by selling bits off to pay bleedin’ death duties.
Mary: Based on those figures, at least 100 acres would need to be sold. That’s nearly 5% of our farm!
Henry: And more, depending on what land was sold, because Capital Gains Tax (CGT) could arise on the land sales too. Maybe 150 acres …
George paces.
Henry: Sit down Dad! Ensors gave us advice on options …
George sits.
Henry: You could gift further assets down, but it’d make sense to gift to David to delay further IHT liabilities arising if something happens to me. If you survive seven years from the date of gift, these should pass down free from IHT in your estate.
David: What about the assets Grandad passed down two years ago? Would IHT be payable if he passes away within the seven years?
Henry: (refers to notes): No, because they were gifted before the Autumn 2024 Budget under holdover utilising APR and BPR at the time. Provided the assets continue to be used in the business, then they’d still qualify for 100% relief even if Grandad passed away within seven years.
George: I’m happy to pass assets down, my income needs are minimal these days, but what if I don’t make the seven years after the gifts?
Henry: If you died after 5th April 2026, then the IHT would essentially apply as if the gifts hadn’t been made, although there could be some taper relief, which means the tax starts to reduce after three years.
George: So … potentially back to square one!
Henry: We could take out insurance for the seven-year period following the gifts, to help with the IHT should it arise, it’d be expensive, but less so than the liability. Plus you’re in good health which might reduce the premiums.
George: I have a life insurance policy if that helps?
Henry: Ensors said we’d need to make sure the policy is written in Trust for others and then it doesn’t form part of your Estate, or you’ll end up paying IHT on the value, giving us a further problem.
David: Assuming Grandad is happy, could assets be passed to Mark and Emma? It’d knock the liability further down the road, but in any event wouldn’t there be CGT on the gifts?
Henry: Depending on the assets, it might be possible to claim what’s known as holdover relief to prevent CGT from arising. As for Mark and Emma – assets can be passed to them, but they must be 18 to take ownership. They could be put in Trust until they get there, assuming they’d want the farm.
David: They love helping out, but they’re still young. I assume partnership assets changing hands, would mean a rejig of the profit share arrangements?
Henry: Yes, for the gifts, the donor would need to be seen to have a decrease in their profit shares with the recipients getting an increase, otherwise the gifts could fail for IHT purposes, meaning that would remain to be taxed in the Estate of the person who made the gift.
Mary: Henry, we should also think about passing business property down. It seems to be about passing things down in life rather than death now, especially if we want the farm to survive … rather than being bled dry by IHT!
Henry: I suggest we meet with Ensors, as my notes aren’t nearly good enough to understand the full implications.
George (gets up): So what are we waiting for?
