Passing on your farm: How to avoid one child paying Inheritance Tax (IHT) when another doesn’t

Ashley Partridge, Head of Wills, Probate & Estate Planning Department,  Parker Bullen solicitors, talks to Farm Diversity about how to avoid one child paying inheritance tax when passing on your farm.

Generally speaking, if your business is trading or is a farm used for agricultural purposes when it passes from one generation to the next, it’s not liable for inheritance tax (IHT), but houses and other assets are liable for IHT. So, for example, if you leave your farm to one child and properties or other assets to another, the child inheriting the farm will pay little or no IHT but the other could be hit by the tax.
 
When farms pass to the next generation, families don’t always realise they can leave IHT unfairly distributed amongst their offspring without intending to. This is especially the case where a farm has diversified into other forms of businesses which may or may not qualify for agricultural property relief. So how can a family ensure IHT liabilities are spread evenly when a farming business is passed from parent to child? 

Some children tend to be more involved in the family farm than others, so it makes sense to leave the farm to them – and leave the remainder of the estate to their siblings. But from a financial point of view, the ones who inherit the farm often inherit significantly more than those who don’t. 

This imbalance can become more pronounced if the farm, when gifted by your Will, is expressed to be ‘free of tax’, because the children inheriting the IHT taxable share of the estate will also be liable for any IHT due on the farm, as explained below.  These children might not only have inherited a smaller amount, but that amount could become smaller still once they’ve paid IHT. 

A farming estate is rarely entirely tax-free, especially for those that have diversified into property letting, holiday lets or any other land uses that don’t qualify for Agricultural Property Relief (APR). The application of APR and Business Property Relief can be complex.  Requirements can differ depending on how long the farm or business has been owned before the relief applies.  There may also be restrictions on the value of the farmhouse as well as the 'hope value' for any land that has potential for planning permission - all of which can affect whether you qualify for tax relief and/or the level of relief you qualify for. Consequently, many families can find themselves facing an unexpected tax bill. 

When making plans for your farm, including how to share tax liabilities fairly, it’s crucial to consider IHT carefully if you want to pass the family farm down the generations successfully. 

A common solution favoured by some clients is to establish a discretionary trust in your will, in which chosen trustees manage the estate and assets after the owner’s death. Trustees decide who ultimately gets what, and can be guided by a detailed ‘letter of wishes’, which is less legally restrictive than a typical will. It can also let trustees divide an estate in terms of the owner’s overall intention, rather than through the ‘letter’ of the will – which could be out of date and not reflect the latest changes to IHT. 

Another route is to make specific bequests in your Will, although you need to review your will and IHT positions regularly to ensure they’re up do date and relevant. The contents must continually reflect your intentions regarding how you’d like your assets split. 
 
Estate-planning can seem complex, but the dividend for taking time at this stage is that in the long run all your children will be treated fairly and your farm assets distributed the way you want them to be. Smooth transition of the business between generations is the ultimate reward for all the hard work you have put in.  

Ashley Partridge, Head of Wills, Probate & Estate Planning Department,  Parker Bullen solicitors