Posted November 20, 2024

The passing on of shares in family businesses and farming assets tax free has long been seen as a given, and critical to ensure their ongoing viability, but from April 2026 farms and businesses that were previously exempt from IHT are now facing an effective tax rate of 20% over the £1m nil rate band.

This sudden change will have a large impact upon those affected, and planning around the preservation of family wealth will need to quickly change to adapt.

A large number of farms and businesses represent illiquid assets, without large pools of disposable cash available to meet this bill. Such sudden and sizeable tax bills will likely only be able to be met by commercial borrowing or selling land/assets, neither of which are desirable.

Gifting assets

Assets such as farmland and business shareholdings can be gifted to beneficiaries, and assuming the donor survives the following seven years, no inheritance tax is due.

Care needs to be taken here that the gift is without ‘reservation of benefit’. As example, if a farm owner gifted the farm to his beneficiaries, but remained living in the farmhouse, full market rent would need to be paid to ensure that the benefit was not reserved and inheritance tax still due.

Whilst passing down assets to beneficiaries is very often a good solution in later life, it can be problematic at a younger age. Business and farm owners need to ensure that they have an income source not only whilst working but also in retirement, which these assets may be providing. Very often in family businesses there is also caution about passing assets down to children too early in case of future divorce and the possibility of then losing part of a family asset.

How would life insurance help here?

A life insurance policy, written into trust, can be a simple solution to covering a potential inheritance tax bill. With the proceeds paid out, upon death, the beneficiaries will receive a tax-free lump sum which can be used to meet the tax bill without having to sell business or agricultural assets.

There are differing types of life insurance that can be helpful here. Term assurance runs to a specific age and is a cheaper option if there is a future plan to gift assets. A whole of life policy is one without an end date and as such will always provide a lump sum, with the trade-off being the premiums are more expensive. Consideration also needs to be given as to whether a joint life-second death plan is preferred, or the flexibility of two soles policies.

As with all financial matters, getting qualified independent advice from a whole of market specialist adviser is essential to ensure the correct plan is in place, structured in the correct manner and in the appropriate trust.

Case Study

James is age 50 and owns a dairy farm that has been in his family for generations. His two sons also reside and work within the farm and it is the family’s intention that they will keep running the farm for the benefit of their own future children. James has met with his accountant and they have explained to him that, should he pass away, there will be a £1m inheritance tax bill to pay.

The farm produces a modest annual profit, but there is not £1m of available capital, and James understands that, were he to pass away before gifting the farm to his sons, they would likely need to sell the family land to meet the cost of the bill.

Whilst James does intend to ultimately gift the farm to his sons, it is not his intention to do so until at least his 70s. James took financial advice and took out a £1m index-linked life insurance contract, running until age 80, to mitigate the risk. The monthly premium for this was £203.14 and the proceeds of the policy are written into trust for the benefit of his sons.

For more information contact Barry Jones on 01270 620555 or email barry@watts-ifa.com