The next inheritance tax change could catch farming families out

It seems a long time since the 6 April and even longer since the announcement at Christmas of the increase in the limits to inheritance tax for agricultural and business assets. Whilst the changes were welcome in that each individual can now leave £2.5m of business and agricultural property without inheritance tax (or £5m for a married couple), they do still leave many farmers in a considerably worse position than before.

The 6 April passed without any further changes to the rules, and they are now in place. The fact that they are now in place does not mean that the need to continually consider succession planning and business structures goes away, it is still worth spending time in making sure that assets pass in the way that is best both for the family and for the ongoing family business, often the farm or business is as much a family member as the family themselves and needs to be looked after accordingly.

The next planned change to inheritance tax rules relates to pensions.From April 2027, pensions are to be subject to inheritance tax..Legally, most personal pensions or SIPPS are set up as trusts. They are managed by trust companies who have the power to decide who benefits from a class of beneficiaries in line with a nomination. 

As a trust, they are not part of someone’s legal estate and therefore have never previously been subject to inheritance tax.Instead, they were always subject to their own tax regime, which was relaxed in recent years so that they would be subject to income tax when money was withdrawn but not subject to inheritance tax.

However, in the 2024 budget, at the same time as the changes to rules on agricultural relief, they have been brought into the inheritance tax regime. There were hopes that the pensions industry would be able to lobby the government to change the rules, but they have not been able to do so and the rules are being brought in.

It will make the administration of estates far more complicated as it means that executors will need to liaise with pension trustees and providers to obtain information and arrange payments of tax in a way that they never needed to do before.Therefore, for those with larger estate, the administration will become complex and possibly slower.

The other side effect for farmers and businesspeople is the fact that assets within the pension are not subject to relief in the way that they are in the estate.So, farmland purchased by a pension fund would be subject to tax at 40% rather than 20% or 0%, depending on reliefs.The same would apply to company shares.

It is therefore important for those with larger pension funds to start thinking about the tax consequences.This usually involves specialist pensions advice, but it is also important to think about pensions in conjunction with wills, partnerships and family businesses so that the whole estate is considered in the round.