More farmers are seeking urgent advice after changes in the budget will bring unspent pensions and death benefits within the scope of inheritance tax.
Many farmers use pensions as a way of passing on wealth, as currently money left in pensions on death is normally free of IHT.
However, this will change from April 2027, when unspent pensions and death benefits will be included in the inheritance tax calculation.
The income tax treatment of pension death benefits is set to remain unchanged.
Currently, if someone dies before the age of 75, then the family can take income and lump sums from their remaining pension funds free of income tax.
If someone dies after the age of 75, the family pay income tax on any money they take out.
This could mean that someone dying after age 75 with a fund of £100,000 could see a £40,000 inheritance tax charge.
The remaining £60,000 would then be subject to income tax of up to 45% leaving only £33,000 of the original amount.
Sean McCann, chartered financial planner at NFU Mutual, said the proposed changes to agricultural and business property relief have caused major concerns for farming families.
But he said the changes to the pension IHT rules was another 'blow' to farmers, adding that it was now important to factor in this when planning.
"Pensions will remain free of inheritance tax until April 2027, which gives a breathing space for those impacted to consider their options," Mr McCann said.
"As we approach that date it will make sense for those aged over 75 to take any available tax-free lump sum to ensure it isn’t exposed to both income tax and inheritance tax."
Post April 2027, it's likely more people will take income from their pension and make regular gifts to take advantage of the 'gifts from normal expenditure' exemption.
This allows people to make regular gifts from income, immediately free of inheritance tax, provided they're left with enough income to maintain their normal standard of living.
“There is no upper limit on this exemption which can provide flexibility when it comes to planning," Mr McCann said.
“It’s also likely we’ll see more lump sums being taken from pensions and gifted to loved ones, which if made more than seven years before death will be free of inheritance tax.
"Many will seek to protect the potential liability with a seven-year life insurance policy, which if put into trust will provide a tax-free lump sum to meet any inheritance tax liability on the gift.”
In recent years, the proportion of farmers and farm workers using pensions to save for later life has risen, according to figures from the Office of National Statistics (ONS).
Employees with workplace pensions in agriculture have risen from 16.6% in 2012 to 64.3% in 2021, the figures from the ONS show.
