With the Office for National Statistics due to publish its Inheritance Tax (IHT) consultation report this autumn, Kirwans law firm has set out its top tips on how to split the farm and avoid being hit by potential IHT changes.
Farmers currently benefit from up to 100 per cent relief from IHT on qualifying assets through agricultural property relief (APR), and after a consultation was launched earlier this year on the current IHT regime, many are trying to put wills in place before any changes come into force.
However, there is one sticking point that tends to slow farmers down when it comes to making wills, according to private client solicitor and partner Claire Currie from Kirwans law firm.
Ms Currie said farmers often struggled to split their estate between their children, particularly when one child is involved in running the farm while their siblings have pursued other careers, and put it off until a later date.
As a result, less than 50 per cent of farmers have a plan in place to pass the farm on.
She said: “Trying to find a simple answer to an often complicated situation can be a real headache to farmers who want to treat each of their children fairly and equally.
“One child may have worked on the farm since they were a teenager, while their parents paid for siblings to go to university and develop ambitions away from farming life.
“The question is how to split a farm that has become so integral to the first child’s livelihood and wellbeing between them and any other siblings who have not been so involved.”
Although it seems like an impossible task, ‘there are ways around it’, she added.
“On a very general level, I would always recommend that families sit down and have honest discussions about the estate and how it might be split. This can help to avoid bad feeling further down the line,” Ms Currie said.
“On a legal level, however, there are various options parents can take to ensure their children are taken care of after their death; whether by inheriting a share of the farm or something else entirely.”
Here Ms Currie sets out some of the ways that farmers can go about dividing their estate:
Hold an initial meeting with all concerned to explain you are considering how to divide your assets in your will, and to manage their expectations about what they will receive.
This will also give everyone the chance to make any points they feel are important before you make your final decision, and will show them you are concerned that everyone is treated fairly.
After the death of a family member, wills are sometimes challenged by those children working on the farm who claim that the deceased made certain promises to them about what they would receive on their passing.
The child may have worked on the farm for an extended period of time for little or no payment in the belief that they would inherit the farm as a result.
Alternatively, they may have chosen a particular lifestyle or occupation based upon a promise of inheriting the farm.
To avoid distressing will challenges after you have gone, do not make any verbal promises to children or family members without setting them out officially in the form of a will.
If one or more children are already working on the farm or farming business, it may be advisable to transfer it to them during your lifetime.
Their siblings could then be left other non-farming assets or investments in the will. Just make sure that all concerned understand what you are doing and why to prevent fallouts.
Since the 55 per cent tax on unused pension assets was abolished, those looking for tax efficient ways to leave as much as possible to beneficiaries have started paying more into their pensions.
If you are under 75 when you die, any nominated recipients of your unspent pension will not pay any tax on the sum.
If you are over 75, the beneficiary will pay their highest rate of income tax on the pension they receive, just as the holder would have done, rather than the pension being subject to IHT – provided they receive the inherited fund as income.
There is a way that the farm could actually be divided between different family members, and that is by passing on part of the freehold of the farm to all.
Each child could then receive a portion of rent from the person remaining in the farm.
By paying into a Whole of Life assurance policy, the insurer will pay out a lump sum to the beneficiary when you die, rather than within a specified timeframe.
By putting it in trust, which is basically a written document explaining what you want to happen to your money on your passing, you are cutting through the legal red tape and avoiding delays by making it clear who should receive the pay out.
This method also means that life cover is not included in your estate, which would make it subject to IHT.
There are a number of other ways that assets can be passed between parent to child while you are still alive in the form of lifetime gifts or transfers of acreage or buildings, but even these need to be handled carefully in order to ensure your beneficiaries are not tripped up by other tax rules.
Always seek legal advice from a specialist solicitor when planning your estate to ensure your estate is distributed exactly as you intended.