Protecting rural family businesses from inheritance tax

It is around a year and a half since Rachel Reeves announced that the government wanted to tax family farms and other trading businesses on death. Much has happened in that time and our clients have been changing their businesses and family ownership structure in order to protect the capital in the business.

This article takes stock of the government’s concessions of 26 November and 23 December last year and suggests what those with higher value farms and businesses should be considering for the future. It especially highlights the issues for those with business assets, including farmland, in pension schemes and the forthcoming change from April 2027.

What were the government’s concessions?

Concession number one was announced on 26 November last year. This is that the 100% allowance for business and agricultural relief that is being introduced from April is to be transferable between spouses and civil partners.

Concession number two was announced on 23 December. This is that the 100% allowance is to be £2.5m per person and for many trusts.

The impact of these concessions in the Chancellor’s flagship policy can be considered in a number of ways.

Will things change with a different government?

The concessions reduce the tax revenue being raised from about £500m a year to maybe £300m. This begs the question whether it is worth all the family grief and business disincentives, given the UK government’s income last year was 380,000 times the amount this policy will now raise.

We now know that a complete climbdown is not going to happen under this government. Whether it will under a future government remains to be seen but is a possibility that must be considered when planning how to structure your business for the future.

As accountants, we urge prudence in planning and so would counsel against getting too optimistic on what a different political party might promise in opposition. However, an increase in the 100% allowance of £2.5m per person at some point in future is very likely, indeed as certain as anything can be from 2031, when indexation for inflation will apply.

Good news for widows and widowers

The biggest ‘winners’ from these concessions are those who are already widows or widowers. Many of these are elderly individuals without much time to make changes to mitigate tax. They benefit from both the increase in the amount of the allowance and the ability to ‘inherit’ an allowance by transfer from their already deceased spouse.

Before these concessions, those widowed individuals would have had a 100% allowance on death of £1m. Now, they should have a 100% allowance on death after April, when the new rules start, of £5m. That is an increase of £4m that would otherwise only have benefited from 50% relief. For those with assets of more than £5m then this is a tax saving on their death of £800,000. That is a lot of money that won’t now need to be found and is something to be grateful for.

Are trusts the answer?

The increase in the 100% allowance favours the use of trusts. Trusts holding farmland or business assets before 30 October 2024 are especially favoured, but trust planning for couples is being encouraged. A couple with good life expectancy could each settle farmland or business assets on trust and effectively double their 100% allowance to £5m each – £10m as a couple.

It’s inevitably a bit more complicated than that sounds, and won’t be for everyone, but a couple could shelter a family farm worth more than £10m from an inheritance tax liability and still keep control.

Higher value businesses

With these concessions, this policy is now very much aimed at much higher value businesses and rural landowners. With reasonable time and opportunity to plan, then it is possible to shelter from inheritance tax businesses worth up to maybe £20m or £30m through a combination of trust ownership, some small direct gifts to the next generation and valuation discounts. Going forward, there will also inevitably be a return to the pre-1992 approach to trying to undervalue assets.

The policy does discourage higher value businesses from remaining in family ownership and will encourage sales to listed companies or private equity – particularly where family members own a high-value asset but get a low annual dividend or rent. We are already seeing some evidence of that, such as Russell & Bromley selling to Next, although there are many other commercial and tax factors in play in any such decision.

This policy makes ownership of high-value, low-yield assets less attractive and farmland tends to come within that category. It is possible that this tax policy reduces the value of those assets over time. Again, we have seen some evidence of that but it is hard to unpack the impact of this policy from all other valuation factors.

What about pension scheme owners?

Currently, owning business assets within pension schemes is the most favoured possible tax structure. This is usually businesses premises for storage, production or administration, as well as farmland. For as long as I have been in practice, and before, it has been encouraged by governments. The pension schemes were historically small self-administered schemes (SSASs) but are now more commonly self-invested personal pensions (SIPPs).

In the pension scheme, the asset is outside of the beneficiary’s estate for inheritance tax. Income or corporation tax relief is available on pension scheme contributions to help fund the property purchase initially. The pension scheme doesn’t pay tax on rental income received from the business for use of the property, and the business gets tax relief on the rent paid to the pension scheme. It is win-win-win-win.

Until April 2027, when that is changing and the inheritance tax position will be disadvantaged compared to other ownership options. Not only will the SSAS or SIPP not get any 100% allowance in the way that a trust does, it won’t even get the 50% relief that otherwise applies. It is a fairly bizarre change, and the impact does not appear to be well understood.

Businesses with assets in SIPPs and SSASs need to take advice ahead of the change in April 2027. There isn’t one single solution and for some people the answer will be to do nothing. The interaction of commercial factors, pension and tax rules and family circumstances means that it is important to tread very carefully and consider the position from a number of different angles. If you are impacted, then you should seek advice.