The initial projections from the treasury are bad enough, with an anticipated trebling of estates paying Inheritance Tax (IHT) from the pension changes alone, but some of the information given has been disingenuous to the point of being deliberately misleading. On the day after the Budget, Rachel Reeves, for example, claimed that 75% of farmers would be covered by the £1m relief for small farms. Her data came from 2021/22, since when inflation has risen by some 20%. Moreover, it is only based on agricultural property relief (given on the value of farmland) and ignores the value of machinery, crops and livestock, and excludes larger tenanted units. There is also the fact that the rates are fixed until 2030, by which time there will have been further inflation of perhaps 15%, so realistically the figure by the end of this parliament will be over 50% of all farms.

However, there is a further misleading element to the calculation. There are some 219,000 farms in the UK, but 60% of them are smaller than 50 hectares. Although this will include some intensive livestock units, it is hard to see that these can be viable businesses at a time when the average profit is £350 per ha and falling, as direct subsidies are withdrawn. What this means is that the part time farmers, smallholders and lifestyle landowners may continue to enjoy IHT exemption while commercial units will suffer a significant and, in many cases, unmanageable tax charges on each death. The rationale behind the changes was to penalise those who sought to invest money in a “lifestyle” farm for tax purposes – given that many of the smallest farms will be covered by ordinary nil rate bands anyway, the alleged objective might have been obtained more precisely by exempting those claims OVER £1m rather than under that amount, or perhaps extending the period of ownership before the reliefs could be claimed.

We are where we are and, without a shadow of doubt, clients will be approaching in numbers to see what can be done. Reminding them that succession planning has been on the agenda for several years but they have chosen not to engage would be tempting, but not helpful. Thankfully, most of the mitigation tools such as CGT holdover, rollover and uplift on death, together with IHT PETs, are still available, at least for the time being, though ominous warnings of another £9bn black hole in the future are already emerging.

The process now must be something along these lines (although obviously bespoke to each client):

• Establish the extent of the IHT exposure, including pensions
• Establish the succession plan in outline: whether, who, when and how
• Consider bringing spouses into partnership and reviewing wills to at least double the effective 100% band
• Consider setting up trusts to maximise the bands further
• Consider lifetime transfers (while they are still available) and possibly insure against the effect of these PETs crystallising within seven years
• Consider incorporation of some or all of the business to facilitate gradual transition

The list is not exhaustive and will raise all the usual concerns about family issues, divorce, remarriage and commitment which have been responsible for slowing down the succession process in the past – but the prospect of an involuntary and forced sell up for tax purposes may concentrate the mind.

It should be mentioned that there are some anti avoidance measures within the Budget. Existing trusts will each have £1m of relief but, where new trusts are set up, the allowance will be divided – and it appears from the brief notes in the Budget pack that this division would be applied to existing trusts where new ones are created. There is also a measure of anti-forestalling on PETs which take place after 30 October and fail within seven years.

Finally, there are practical issues. Firstly, from a PI perspective, it is important that all relevant clients are advised of the impact of these changes and encouraged to take action to mitigate the effect as far as possible. Whilst the clients themselves may be well known to the practice and perfectly amenable, that description will not necessarily apply to their executors who have a duty to maximise the assets of the estate and may be looking to blame someone for the shortfall in their expectations. Secondly, there is the sheer magnitude of checking wills, carrying out calculations and devising plans for every agricultural client. Solicitors, land agents and accountants are likely to have a very busy period coming up in this respect (along with tax return deadlines, basis period calculations and the approach of MTD).

Finally, when the time to settle up with HMRC does arrive, it seems likely that the process will be even more protracted than it is now. HMRCs own projections anticipate a trebling of the number of estates falling into IHT solely as a result of the pension changes. This will put pressure on the probate service, District Valuers and the Capital Tax Office, particularly since many valuations, which now go through “on the nod” because there in no tax at stake, will be far fewer.

^{Sources: HMRC Budget press releases, Agriculture in the UK Evidence Pack September 2022 update}

^{*The views expressed are the author’s and not ICAEW’s}