The Dorset Farm with a Hidden Tax Problem

A working farm on the Dorset–Somerset border. Roughly 240 acres of mixed arable and grazing, a farmhouse, three cottages, some redundant barns already converted to holiday lets. The owner — call him Michael — was in his early seventies, still running the farm with his son.

The existing plan, drafted in 2011 by a local high-street firm, left the whole farm to his wife on first death, then to their son on second death. The assumption behind it was simple: Agricultural Property Relief at 100%, no IHT, done.

By the time we sat down with them in early 2026, four things had changed. The land was now valued at £4.6m, not the £1.8m it was in 2011. The farmhouse was worth £900k on its own. The holiday-let conversions probably didn't qualify for APR at all — they were investment property under HMRC's post-Pawson case law. And the April 2026 £1m APR/BPR cap was six months from taking effect.

The modelled IHT liability under the new rules, on second death, was £780,000. Payable in ten instalments — from a farm generating around £55,000 of profit in a good year.

The plan should have been reviewed in 2017 when the Residence Nil-Rate Band came in, again when the APR/BPR cap was announced in October 2024, and structured around both spouses' allowances from the outset.

Ideally, ownership of the farm would have been split between Michael and his wife years earlier, so both £1m APR caps could be used cleanly on death. The holiday lets should have been separated out — either sold, or restructured into a genuine trading business, or held in a way that priced-in the eventual IHT charge.

A gifting programme to the son, starting when the eldest generation was in their sixties, could have moved substantial value out of the estate under the seven-year rule. None of this had happened, because no-one had ever sat the family down and modelled the actual number.

We restructured in stages. First, we split ownership of the farmland and farmhouse between Michael and his wife, using a proper Deed of Trust — so both £1m caps would apply on death, protecting £2m of value at 100% relief instead of £1m.

Second, we started a formal gifting programme of farmland to the son, using holdover relief on the capital gains and starting the seven-year IHT clock immediately. The son was already farming the land day-to-day; formalising the ownership shift was overdue.

Third, we separated the holiday lets into a distinct LLP structure, so the treatment of those assets could be handled cleanly and separately from the core farm.

Fourth, we put life cover in place — written into a proper trust — to fund whatever IHT liability remained on second death. The premium was affordable; the peace of mind wasn't.

The net effect: projected IHT on second death fell from £780,000 to around £180,000, fully funded by the life cover. The farm stays intact.

Farms are the estates where the largest amount of money is quietly at stake, and where the least review typically happens. If your farm plan has not been looked at since 2024, it is out of date. The £1m cap is a structural change, not a technical tweak, and it needs a structural response.