Don’t panic but do start planning

“Someone’s sitting in the shade today because someone planted a tree a long time ago.” (Warren Buffett – Investor)

Farmers perhaps do not need advice from an investor about what to plant or sow, nonetheless, a reminder to look and forward plan at this time of change and uncertainty in the agricultural world is not a bad reminder, as the actions taken now are going to make all the difference to future generations of family farms and farming families.

The nature of the changes to the industry brought in by the recent Budget are well documented so are not covered in any detail in this article. It feels impossible not to acknowledge, however, the full extent of the blow to farmers on all sides, some of which only emerged in the small print following the Budget. Not only the reductions to Agricultural Property Relief and Business Property Relief on all assets (not just the land), but also gradual tapering of Basic Payment Scheme payments being replaced with dramatic cuts, with many farms having their budgets for the next financial year slashed by tens of thousands of pounds without warning.

These cuts are being made to businesses that are at the same time being asked to somehow find more income to fund increases in employer’s National Insurance contributions, increases to the national living wage and higher import taxes on fertilizers, thought to add roughly £50/ tonne to fertiliser costs and now also VAT on the common farm vehicle that is the double cab pickup. And all from a business that may be asset ’rich’ but in most cases is markedly cash poor.

Within our specialist Agriculture and Estates team we have several team members who are actively involved with their own family farms, so they are experiencing this alongside the clients they are advising and fully understand the realities of the change. Some of the alterations may seem relatively minor but the combined effect is to pull the rug, the carpet, the floor and quite literally the soil from under farmers’ feet from every direction.

“Have a bias towards action – let’s see something happen now. You can break that big plan into small steps and take the first step right away.” (Gandhi)

We cannot make the ’big plan’ proposed by Gandhi until we have the full picture from the consultation results and then final legislation, but we can start the ’first steps’. The government has talked openly about the potential to plan around the changes and potentially increased the exempt threshold to £3m by doing so (although there has been some movement in this figure) and plan we all must.

The focus of this article is therefore on what can be done at this stage to look to regain some stability. The Country Land and Business Association (CLA) has confirmed that the changes relating to Inheritance Tax (IHT) reliefs will need enacting via the new Finance Bill before they are effective. All current thoughts are therefore subject to what the draft legislation looks like and the nuances of the technical detail. Only once this has been clarified in the new legislation can the potential impact on each individual and business be fully assessed and then, hopefully mitigated against.

This planning should include making sure you are clear, with your solicitor if necessary, about who in the family owns what and that you have the necessary deeds to evidence this – essentially getting all ducks in a row so that there are no unnecessary delays once it comes to taking action. Don’t make rash decisions but prepare the ’seed bed’ of change.

Potential Options

What this could look like is an evolving picture as further detail about the changes is released and more is awaited. At this stage there looks to be a number of potential options, such as the following:

• For assets to skip one or more generations by way of a lifetime gift of assets. However, the person making the gift would still then need to survive by seven years if the gift is to be exempt from IHT. As the composer Leonard Bernstein once said, “To achieve great things, two things are needed; a plan, and not quite enough time.” The government has certainly seen to the time pressure element here. The sad reality is that, for many farmers of a certain age and life expectancy, the window between now and April 2026 is not going to be long enough for them to make use of IHT-free lifetime giving. For those for whom it is a viable option, careful consideration must still be given to several factors, including the following:

1. What can the top generation realistically afford to give away? You cannot give land away and continue having benefit from it (known as the ’Gift with Reservation of Benefit’ rules). The recipient being in partnership with the donor can make this easier. Replacing this income with income from a pension that would otherwise now be at risk of tax may be another option. This is something that the top generation can be discussing with their accountant now.
2. The status of those receiving the gift of land – for example, do they have Pre or Post-Nuptial Agreements/ Wills/ Powers of Attorney in place?
3. Whether a policy to insure against the risk of IHT being paid on a lifetime gift is an affordable option, especially for younger generations in receipt of a lifetime gift. However, insurance policies should be written in Trust so that there is not effectively a double whammy of tax.
4. Capital Gains Tax (CGT): Most gifts of land farmed in hand qualify for holdover relief from CGT so there is no CGT to pay unless and until the recipient sells. However, holdover relief does not apply for non-trading assets. If land is let out for storage / industrial units / residential properties/ holiday lets for example, then the use of holdover relief may be restricted, so CGT should also be considered in the context of lifetime gifts.

• Making a lifetime gift of assets to a Settlement (in life) or Trust (on death) to benefit children. The legislation will be particularly important here and we are told is the area on which the consultation early in the New Year is focused. A transfer into Trust may be a less favourable option than it was pre-Budget as there is now only £1m of relief per person setting up the Trust, regardless of the number of Trusts, rather than per Trust as it was pre-Budget. There are also potential exit charges and a charge every 10 years to be mindful of. Nonetheless, Trusts and Settlements still give maximum flexibility and provide asset protection. Anyone who has an existing Trust/Settlement set up pre-Budget should consider keeping it and should take careful advice as to whether or not adding to this would bring all of the assets into new regime.
• Equalising assets between spouses to ensure that both make use of their £1m and any other allowances. If everything is left to the spouse on a first death then the £1m relief is effectively lost as they have spousal exemption anyway.
• Looking at different business structures, such as companies, to maximise eligibility for reliefs, particularly where there is a potential land use, such as development, that is likely to result in a significant uplift in value. Look at perhaps moving assets into the partnership business so as to be eligible for IHT at an effective rate of 20% rather than 40% above the £1m threshold.

Next Steps

Darwin’s survival of the fittest adage, “It is not the strongest of the species that survive, not the most intelligent, but the one most responsive to change” is a familiar one. Farmers are already competent and well-practised at adapting to change and dealing with uncertainty and they will have to draw on those skills again to thrive in this new farming landscape. We are saying to our clients to stay calm, not to make any knee-jerk reactions but to start family discussions and engage with the next generation, perhaps over Christmas, about a plan of action for when the changes become law.

Some of these conversations may be difficult and have been put off for many years, but the sooner they are started, the better. Then, in the New Year and once the details of the new legislation are known, those conversations should be opened up to include your professional advisers, starting with your accountant, and likely in due course to include your solicitor. In the words of E. Roosevelt, “It takes as much energy to wish as it does to plan.” Let’s use our collective energy to best effect and direct it towards what can be done, which is to take a breath, and then plan.