Introduction
Pre-Autumn 2024 Budget the family farm was exempt from inheritance tax (IHT) due to 100% Agricultural Property Relief (APR).
After the 2024 Autumn Budget the family farm had a potential tax bill of £0.2m on the £3m farm. The 100% APR had been capped at £1m per person, so £2m per couple with the remainder taxed at 50% of the 40% current IHT, so 20% on £1m which equals £0.2m. This number will likely rise over the next decade as the farm continues to increase in value due to inflation.
The family also looked at placing the farm into a discretionary trust but due multiple tax changes on trusts over the last few decades, the savings were negligible for an income producing farm plus the entry charge is now around £100,000 on a £3m farm due to the changes in APR. On top of that the 6% charge every 10 years on the value of the asset held in the trust could be £100,000 each 10 years.
The 2024 Autumn Budget also increased the CGT and even the Business Asset Disposal Relief on farms and businesses by 40% to 14% and another 40% increase due next year to 18%. The combination of changes in the budget also made a discretionary trust unattractive due the upfront £0.1m entry charge due to all these reduction in IHT relief.
However, there was another combination of strategies that could mitigate the IHT back to 0% just like before the 2024 Autumn Budget, a Family Investment Company.
The table below show the difference between the tax rates before and after the 2024 Autumn Budget, along with a comparison with a Family Investment Company and a Discretionary Trust.
| Pre-2024 Autumn Budget | Post 2024 Autumn Budget | Family Investment Company | Discretionary Trust | |
|---|---|---|---|---|
| Income | Up to 45% | Corp. Tax | Corp. Tax | 45% |
| Corporation | N/A | 19-25% | 19-25% | N/A |
| Capital Gain | 10*-24% | 14**-28% | 0%***-25% | Up to 45% |
| Dividend | 8.75%-39.35% | 8.75%-39.35% | 0% | 39.35% |
| Inheritance | £0 due to APR | £0.2m due APR cap @ £1m each | £0 via a combination of trusts | £0 after 7 years + 6% charge every 10 years |
| Entry Charge | N/A | 0%**** | 0%**** | 20% over nil rate band & APR/BPR |
A Breakdown
*Business Asset Disposal Relief (BADR), aka Entrepreneurs Relief, was 10% with a £1m lifetime limit on this relief
** BADR but £1m lifetime limit
***Substantial Shareholders Relief is available when a holding company sells shares in a trading subsidiary
****Incorporation Relief is available when adding trading businesses to a FIC to hold over the Capital Gains Tax when incorporation the business plus potentially SDLT on properties used by the trading business
Strategies
The couple had been running the farm as a combination of partnerships and ltd companies. The main farming partnership was able to incorporate into a company, along with a unique holding company called a Family Investment Company (FIC).
The FIC was established with alphabet shares, splitting the common shares into Voting, Freezer, Growth & Dividend shares.
What are a Family Investment Company's main share types?
Voting Shares – These control the FIC via the voting rights, which means they can elect and remove directors within the FIC. They have a nominal to prevent and tax issues plus allow them to be bought back if someone outside the direct blood of the family gains control of them in some way.
Freezer Shares – These are fixed in value and issued in exchange for cash, assets or shares in subsidiary companies. The freezer shares have no voting rights but instead are given preference capital status to reduce the possibility they lose their value due to the other share classes. There fixed value allows the future growth to be passed on to the next generation tax efficiently
Growth Shares – These are floating capital value shares, to start off they have a nominal value to allow them to be gifted into trusts without the potential 20% entry charge, they can also be diluted, they are used to transfer future growth and therefore mitigate CGT & IHT liability for generations to come. They don’t have voting rights, giving the board of directors and voting shareholders indirect of the trust and therefore trustees by limiting their dividend income and in turn market value if required.
Dividend Shares – Are used to provide different dividend income to multiple different family members to use up personal allowances and give access to funds as and when individuals require an income. Usually, the founder has one each to fund their retirement, allowing them to give up the Freezer Shares without losing access to future income. Their nominal value, with no voting rights and being redeemable means the FIC can buy them back and reuse them for multiple generations.
The couple received most of the Voting Shares, along with the Growth Shares and Dividend Shares. The family then added the now incorporated farming partnership to the FIC in exchange for £3m worth of Freezer Shares.
At this point they still had the potential £0.1m IHT liability due the 2 x 100% £1m APR then 20% on the £1m over that, however the Freezer shares fixed their estate value at £3m, as the growth shares now captured the future increase in value. The £1 Growth Shares where gifted into a discretionary trust with the couple and God parents as trustees, the children and grandchildren as beneficiaries, passing on the future growth for generations to come.
The current £0.2m IHT liability was then mitigated by a different type of trust, an Employee Benefit Trust, which doesn’t have the same 20% entry charge or 6% charge every 10 years. The EBT was gifted £1m worth of Freezer Shares to then retain the £1m each for future income and retirement purposes, as they could be left to the children in a Will if needed free of IHT due to the 100% APR on these shares. The nominal value Voting Shares meant the couple remain in control of the FIC and therefore farm. The subsidiaries under the FIC also allowed the children to take over the day to day of parts of the farm with the couple being directors of the FIC to manage the main investment and dividend distribution each year.
The diagram below shows the different shares and director positions the couple had, which ones where gifted into trust and which ones the children where given, along with who the directors of each company where.
The result put the family back to the 0% IHT liability along with the ability to reduce their income tax liability by retaining and profits in the FIC and only pay 25% corporation tax instead of 40-45% income tax they did via the partnership when earning over £50,000 each. If they did require more that £50,000 income per year, they could redeem the Freezer Shares to pay the lower 14-18% CGT instead of 40-45% on that income. The FIC and trusts setup not only prevented any IHT issues caused by the 2024 Autumn Budget, but they also saved taxes in multiple ways in comparison to the partnership they had before.
