Inheritance Tax – How do I keep the farm in the family?

By Andrew Heskin, Partner and ARA specialist

Inheritance Tax (IHT) is something a lot of people worry about, particularly when they’ve got a farming business that they want to remain in the family.

Everyone wants to maximise the amount passed on to their loved ones and ensure their assets retain their value.

When does IHT apply?

IHT kicks in when the value of your estate goes over the tax-free limit of £325,000, which is frozen until April 2028. Your estate typically covers things like property, investments, and savings.

The tax rate for IHT is 40 per cent on anything above £325,000. However, there are a lot of exceptions to this rule, so it’s important to regularly check the value of your estate to see if IHT applies to you.

If you think your estate will go over the IHT threshold, it’s crucial to understand what your beneficiaries might have to pay. It’s also a good idea to look into ways to plan ahead and potentially reduce these costs.

Keeping the farm in the family

It is important to have an up-to-date Will in place which sets out how you wish your beneficiaries to inherit, which is particularly important if you have children or other family members who do not take an active part in running the business.

You can transfer certain agricultural property without paying Inheritance Tax, either while you are alive or through your will.

To qualify for Agricultural Relief, the property must be used for growing crops or raising animals. This includes:

  • Growing crops
  • Stud farms for breeding and rearing horses, and grazing
  • Trees planted and harvested every 10 years
  • Land under the Habitat Scheme
  • Land under a crop rotation scheme
  • The value of milk quotas associated with the land
  • Some agricultural shares and securities
  • Farm buildings, cottages, and farmhouses

You should know that farm equipment, machinery, livestock, harvested crops and property that is derelict or with a binding contract for sale will not be eligible for the relief.

Residence nil-rate band (RNRB)

If you own a property, you can increase your IHT threshold from £325,000 to £500,000 by applying the RNRB provided you meet the following criteria:

  • You must have lived in the house at some point after July 8, 2015.
  • You must leave the house to a direct descendant, such as your children, grandchildren, stepchildren, adopted children, or foster children.
  • If your estate is worth more than £2 million, the RNRB is reduced. Specifically, it decreases by £1 for every £2 your estate exceeds £2 million.

If you leave your entire estate to your spouse, your unused nil-rate band will double your spouse’s tax-free allowance to £650,000.

Similarly, if you don’t use the RNRB, your spouse’s tax-free allowance will increase by £350,000, which is beneficial if your property is worth £350,000 or more.

Putting the farm in a trust

Using a trust for succession planning in a farming family can be a practical and effective way to ensure the farm’s continued success and the fair distribution of assets among heirs.

Though it may seem complex, with proper guidance, it can be a valuable tool for preserving your family’s farming legacy.

A final note

Farming families have many options, including creating trusts to protect assets while retaining control of the business.

It’s important that the whole family lay all their cards on the table and talk openly about their wants, needs and expectations when it comes to the family farm. Not everyone’s ideas and feelings will align, so early discussions are best to reduce potential disputes.

Since there is no universal formula for reducing taxes with no two circumstances being the same, it is important to seek professional advice to ensure the specific needs of your family farming business are preserved for future generations.

Please get in touch if you’d like a tailored review of your circumstances and we will put together a plan to help minimise the tax you may have to pay.