For many decades, the strong advice for farming families wishing to avoid inheritance tax (IHT) and maximise capital gains tax (CGT) uplift in valuation of the assets on the death of the owner, was to “die in harness”.

Until now, the vast majority of agricultural estate planning has been based on that premise.

However, the Chancellor's autumn budget has thrown all of that estate planning into the air, or has it? The dust is beginning to settle and, as ever, it is becoming apparent that the devil is in the detail. No two families are alike – one size does not fit all.

The legislation, if passed in its current form, will bring about significant modifications to the IHT reliefs available for farmers in Scotland, but it does not abolish them.

Many agricultural families are rightly worried about the implications these changes may have on their farming operations, where cash flow is often tight or there is a lack of liquid assets that could be sold without adversely affecting the business to cover IHT expenses. As always, planning for the future is key. Unfortunately this time, there has been a dramatic shifting of the goalposts and the planning may prove more challenging!

The main changes influencing succession planning for farmers is the proposed reduction in relief available by way of  Agricultural Property Relief (APR) and Business Property Relief (BPR), in relation to both death and lifetime gifts. In the past, a considerable number of farms and agricultural enterprises could count on 100% APR and BPR to reduce their IHT liabilities to nothing or nearly nothing – as there is currently no cap on the total amount of relief. However, these reliefs are now being restricted to a £1 million per individual, beyond which only 50% relief will apply, leading to a 20% effective IHT rate on those qualifying assets.

Unlike the current nil rate band reliefs, this £1 million cap will not be transferable between spouses if it is not utilised at the time of the first death, thereby tightening up any post first death planning.

There was initial conjecture that the use of trusts may prove the way forward, however, any trusts established following the budget will also be subject to this personal allowance, removing a potential avenue for securing additional IHT relief on assets.

In practice, most agricultural businesses possess land, possibly an agricultural tenancy, buildings, livestock, machinery, and partnership interests that far exceed the £1 million limit, even when assets are divided among multiple partners. It should be noted however that the value of the assets is not the only factor. Any debt secured against the land or unsecured in the business must also be taken consideration of in arriving at the net figure for the purposes of calculating value in a deceased person’s estate.

Without strategic planning, many may now face an IHT burden upon death.

Gifting in life becomes a real option for the first time since the introduction of APR by the Inheritance Tax Act 1984. The current proposal is that the £1 million allowance will also apply to any lifetime gifts made from the budget date onwards. However, these gifts will be excluded from the estate if the donor survives for seven years after the gift, thus avoiding IHT.

One example of the variation of circumstances may be where the farmer does not have family who wish to continue farming. In those cases, there is interplay to be considered as to whether gifting in life is best for all.

The current rules mean that, on death, the deceased’s property is revalued to date of death, not only for the calculation of IHT but also to rebase the value of the asset for CGT purposes. If the property is gifted in life a “holdover” election may be made on that gift. This means that whilst CGT would normally be payable by the donor, this CGT liability is held over until the asset is subsequently disposed of, with the base value being held at the value which the asset was acquired at or, if acquired pre-1982, at the 1982 value. The CGT is then calculated on disposal at the rate then in force, currently up to 24% depending on the income tax rates of the person disposing of the asset is subject to at that time.

If the owner of the farm were to decide to retain the agricultural property until after their death, then on the date of death the property is revalued for CGT purposes as at that date, known as a “re-basing” of assets. This would mean that the value of the retained agricultural and business property was included in the IHT calculation, with reliefs available on the estate, but on the post death sale the CGT payable would likely be nil, or negligible.

This is worth considering if the farmer does not have family who wish to continue farming and would be selling up on the passing on of the farmer. It is not straightforward and specific calculations based on up-to-date accurate values would have to be carried out to weigh up the pros and cons.

These are all considerations around financial impact. However, it is never that simple and it is also important not to let the tax tail wag the dog.

On balance, will we now see these changes prompting a rise in lifetime transfers of farms and agricultural assets, potentially occurring at younger ages than previously customary? This seems likely and may not be a bad thing with the average age of a Scottish farmer currently standing at over 60 years old.

Undoubtedly, these proposed regulations will shake up how succession planning is approached, with an emphasis on strategically utilising available reliefs and allowances, and the use of life insurance policies designed to mitigate the effect of IHT on the future viability of the farm.

There may have previously been a somewhat relaxed attitude towards the very thorny issue of succession planning in the agricultural sector, with many relying heavily on existing tax reliefs. To safeguard their businesses in the future, this mindset will need to change.

More comprehensive information regarding these new regulations will be disseminated early next year. We advise using the time leading up to that point to evaluate the assets held, consider their valuations, and engage in discussions with family members about potential future strategies.

Our rural business and private client teams are well versed in helping families, individuals and businesses to plan for the future. Please get in touch with Linda Tinson or Lorna McKay if you need help with or want to discuss anything raised in this insight.