With the new Inheritance Tax (IHT) rules coming into effect on 6th April 2026, many farmers and business owners are in the process of gifting assets to reduce the impact of the new rules.
Draft legislation confirms that 100% Agricultural Property Relief and Business Property Relief will only apply to £1 million of qualifying assets of an individual’s estate. Above this allowance, 50% relief will apply.
By gifting assets during your lifetime, you reduce the size of your estate and can potentially reduce your Inheritance Tax liability.
For a gift of farming assets to be effective for IHT purposes, it is necessary to survive seven years from the date of the gift. However, in some circumstances, an asset is treated as still owned, even though it has been given away, and IHT could still be due. It is therefore important to ensure the gifts you make are effective.
Gifts with reservation provisions
The Gifts With Reservation (GWR) provisions treat a gift as ineffective if the previous owner continues to benefit from the asset. The most common way this can happen is where a person continues to live in a house after they have given it away, or continues to receive the same profit share after giving away part or all of the farm.
If this is the case, HMRC will treat the individual as still owning the asset when calculating the IHT. There is no seven-year limit for GWR, meaning this can still impact a farmer’s IHT many years later.
Below are some examples of how GWR rules might apply when gifting assets.
Example 1:
A farmer gives away a farm, including the cottage he lives in, to his children. He retires from the farming partnership, but continues to live in the cottage. The cottage is caught by the GWR rules, and will be included in his estate when he dies. One way this could be avoided is for the farmer to pay a market rent to his children to continue living in the property.
Example 2:
The facts are the same as example one, and the farmer continues living in the cottage for three years before leaving to live elsewhere. He then dies five years later. Although the property was gifted more than seven years before the farmer died, and there is no reservation of benefit at the time of his death, it will still form part of his estate. This is because the gift is not effective for IHT until seven years after the benefit has ceased.
Example 3:
The facts are the same as example1, but the farmer remains in the partnership. How can the farmer demonstrate that he is not continuing to benefit from the land and buildings he has given away? One way would be to amend the partnership profit sharing so that the children receive more profit. Another would be for the children to rent the farm to the partnership.
Example 4:
A farmer gifts a farm to his children, retires from the partnership, and moves out of the farmhouse. Ten years later, he returns to the farmhouse due to ill-health so that his family can look after him. This appears to be a GWR as in example 1, but fortunately there is an exemption in the legislation which prevents HMRC from including the house in his estate in these circumstances when he dies.
As can be seen from the examples above, great care is required to ensure that gifts of assets are effective in reducing the likely IHT liability under the new system.
If you would like advice about gifting assets and Inheritance Tax planning, please get in touch. Call 0808 144 5575 or email help@armstrongwatson.co.uk.
