Passing on the farm: Potential pitfalls of lifetime gifting and the seven-year rule

For many farming families, lifetime gifting can effectively reduce future inheritance tax (IHT) liabilities and support the next generation. However, gifting land, partnership interests or farm buildings is rarely as simple as transferring ownership and moving on. The seven-year rule (explained below) is only one part of the picture, and poorly planned gifts can create unexpected tax, legal and practical problems.

At the moment, the tax landscape for making lifetime gifts is known, but this may change with John Healey’s first budget, now announced for 28 October 2026. We therefore urge farmers to speak to their accountants as a priority about whether their assets qualify for the new £2.5 million (or, if you are married, a combined £5m) threshold on death. If you are over those thresholds, or the way you own and run your assets means that, at present, you don’t qualify for the exemptions, then lifetime gifting or other changes may be needed to transfer or clarify any property or partnership value to someone else, or otherwise plan for the tax bills on any death. We recommend that any gifting occur before any new and unknown tax changes on 28 October 2026.

What is the seven-year rule for inheritance tax on a death? And who pays IHT?

A donor must survive a gift by seven years for its value to fall completely outside their estate for IHT purposes. If they die between three and seven years of making the gift, the IHT relief is tapered until they get clear of the seven years. The person receiving the gift pays IHT, not the person making the gift.

Ongoing benefit

Farm owners may assume that, once ownership has been transferred, the IHT planning is complete. In reality, HMRC often looks beyond the paperwork and considers what happened in practice. One common problem arises when the person making the gift continues to benefit from the farmland or property after the transfer, such as by taking the same share of the partnership profits as before the gift or by continuing to live in the gifted property rent-free. The partnership agreement can address this by adjusting profit allocation in consultation with the accountant or by establishing a formal tenancy for the property at market rent.

What about Capital Gains Tax?

IHT tends to dominate succession planning discussions, but lifetime gifts can also trigger Capital Gains Tax (CGT), and CGT has different rules and time scales for reliefs. CGT bills are payable in lifetimes, by the person making the gift, and there is no equivalent seven-year rule. Careful planning is needed to avoid triggering an unwanted tax bill, which would then be payable in the next 12 months or so.

Given the appreciation in agricultural land values over recent decades, many farming assets carry significant built-in gains. Reliefs may be available in certain circumstances, but an accountant must assess each case carefully. We usually start by asking the advising accountant whether the assets being gifted qualify for CGT business reliefs, which is often the case if they have been confirmed as business assets, but evidence of this is the most important element here.

Are all children being treated fairly?

Many farming families have one child actively involved in the business and others who have chosen, or had to, pursue different careers off the farm. Passing agricultural assets to the farming child may be important for business continuity, but families should manage expectations openly to avoid disputes later. Fairness since the 30 October 2024 Budget often does not mean equality in farming businesses. Plus, now that pensions come into IHT (with no relief) from April 2027, the non-farm assets pool for the non-farming children will diminish.

Should gifts be documented formally? And can documents be backdated?

Gifts must be in writing for anything involving land, and the larger or more valuable the asset, the more important it is to document exactly what is being gifted, including any rights (access, services, etc.) being granted or retained.

Why Wills and Partnership Agreements still matter

Lifetime gifting should usually form part of a broader review involving Wills, partnership agreements, and tax planning arrangements. These documents need to dovetail properly to achieve their intended purpose, both personally and at the business level.

Looking beyond the seven-year rule

Successful gifting strategies are rarely based solely on surviving for seven years. Effective succession planning should look beyond immediate tax savings and anticipate future challenges, particularly relationship changes and the intended recipient’s circumstances and financial security, as well as the donor’s ongoing income needs. For example, is the person you plan to gift to in a stable marriage, or could a transfer to them make the farmland or property vulnerable in a divorce unless a pre-nup or post-nup is in place to guard against it? Do they have a Will in place so that onward succession can be controlled and ensured?

A further crucial consideration is to whom a lifetime gift of farmland or property is made. If the land or property is held within the partnership business, as is often the case to enable full IHT reliefs to be claimed on any death, it can only be gifted to another partner unless the other partners agree to release it for a gift to a non-partner. If the partner wishes to gift to a non-partner, they will either need the other partners to agree to bring that person in as a partner in the business or agree with the other partners to release that land from the partnership if that is what the accountant advises, but with likely tax consequences of doing so.

Every farming family is different; what works for one farm won’t necessarily work for another, and succession plans should ultimately be tailored to individual circumstances.

How Ashtons can help to navigate these challenges

At Ashtons, our specialist Agriculture and Estates team works closely with clients’ accountants, who provide tax advice, and we work with you to determine what is best for the family and put in place the succession planning steps recommended by the accountant. We offer a fixed-fee initial review, from which we can then map your plan of action.

Contact our Agricultural Law solicitors today

If you need legal assistance for your agricultural business, please get in touch with a member of our Agriculture and Estates team or complete this online enquiry form, and we will be happy to assist you with your enquiry.