With new Inheritance Tax (IHT) rules taking effect from April 6 2026, many farmers are in the process of gifting assets to reduce future tax liabilities.
Gifting assets during your lifetime can reduce the size of your estate and potentially lower your IHT bill.
For a gift to be effective, you must survive seven years from the date of the gift.
Even then, a gifted asset may be treated as still owned (and part of the estate), particularly under the Gifts With Reservation (GWR) provisions, where the previous owner continues to benefit from the asset.
Common examples include continuing to live in a house after transferring ownership and continuing to receive the same profit share after giving away part or all of the farm.
In such cases, HMRC will treat the asset as still owned by the donor when calculating the IHT. There is no seven-year limit for GWR, meaning this can still impact a farmer’s IHT many years later.
Scenarios where GWR rules apply
- Living in a gifted property: A farmer gifts 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.
- Delayed departure: If the farmer continues living in the cottage for three years before moving out, then dies five years later, 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.
- Remaining in the partnership: If the farmer remains in the partnership, they must demonstrate that they no longer benefit from the gifted land and buildings. This could involve amending the profit shares so that the children receive more profit or for them to rent the farm to the partnership. Returning due to ill-health: If the farmer moves out after gifting the farm and retires from the partnership, but returns 10 years later to be cared for by his family, an exemption may apply. These circumstances prevent the house from being included in his estate.
As can be seen, great care is required to ensure gifts are effective in reducing the likely IHT liability under the new system.
Armstrong Watson is hosting a free webinar on September 23 at 7pm to explore the practical steps farmers can take to mitigate the impact of the new rules.
Experts from the firm’s tax, financial planning, and business services teams will provide insights into how to safeguard assets and prepare for the future.
To register please visit armstrongwatson.info/agritaxwebinar
