The significant changes to Inheritance Tax (IHT) announced by Rachel Reeves in her first Budget have caused considerable concern among farming families and agricultural landowners.
Farmers who presently qualify for 100% agricultural property relief (APR) and/or business property relief (BPR) may now face significant IHT liabilities on death once new rules come into force from 6 April 2026.
Under the new regime, the full 100% relief will be restricted to the first £1m of combined APR / BPR qualifying assets for each individual. 50% IHT relief will be available for APR/BPR qualifying assets in excess of this.
The £1m lifetime allowance will cover property in the estate at death as well as lifetime transfers made to individuals and to most trusts in the seven years preceding death if these transfers were made after the date of the Autumn Budget, 30 October 2024.
These changes impact farms and businesses exceeding the new £1m allowance, which may be subject to an effective IHT rate of up to 20%, challenging their financial stability and succession plans.
However, steps can be taken in most cases to either reduce or eliminate the increased IHT liabilities that could otherwise arise under the new regime.
Review asset valuations
Ensuring accurate valuations are available for all farm assets, including land and equipment, as well as understanding to what extent any borrowings will set against these asset values, is essential for concerned farmers to understand to what extent they may be exposed to an IHT charge on death under the new regime.
Review existing will planning
For married couples, assets can still pass tax-free to a surviving spouse, who can also inherit the unused proportion of their spouse’s £325,000 Nil Rate Band. Importantly, the new £1 million APR and BPR limit cannot be passed to the surviving spouse, so any wills that leave all assets to the survivor may no longer be tax-efficient, given the IHT that could subsequently arise on the second death.
Consideration should also be given to the farmhouse, which may not in the future benefit from full APR as may have been expected. Each individual has a £175,000 Residence Nil Rate Band, which can transfer between spouses and applies where a residential property is left to a direct descendant. The eligibility for this additional nil rate band starts to be withdrawn where the death estate exceeds £2m, so again, leaving everything to the surviving spouse may no longer be optimal.
Lifetime gifts
For many farmers, a solution is likely to involve advancing plans for succession by making lifetime gifts of farm assets to the next generation.
Where an individual makes a gift to an individual and ceases to derive any benefit from the asset gifted, if they survive a further seven years, the value of the gift falls outside of their estate for IHT. Where the individual does not survive the gift by seven years but survives it by three years or more, ‘taper relief’ can apply to reduce the IHT liability.
The availability of holdover relief on such gifts allows the Capital Gains Tax costs that would otherwise arise on land held at a latent gain to be deferred.
Farmers may, therefore, wish to start thinking about their succession plans and the use of such gifts to reduce the value of their estates below the threshold beyond which IHT liabilities would crystallise.
However, care is needed with such gifts, given the risk of farm property becoming exposed to third-party claims against the recipient’s estate in the event of divorce or bankruptcy. Appropriate professional advice to understand the risks associated with such planning is essential.
Widening farming partnerships
It could be beneficial for farmers to spread the ownership of their farming partnerships more widely between multiple family members. This would increase the number of £1m limits applicable to the aggregate total value of a farming business.
Such changes should, however, be considered carefully as there are commercial implications of including wider family members in the farming business, as well as increased complexity and potential costs.
Life insurance
We expect to see many more farmers exploring the feasibility of insuring against their IHT exposures. Understanding the available options and associated costs is likely to be an essential step.
Where farmers are considering lifetime gifts, they could also explore the costs associated with insuring against the IHT exposures over the seven years following the date of the gift. In many instances the peace of mind provided by an appropriate life insurance policy is likely to exceed the costs of such cover.
In addition, farming families could also consider exploring the costs of life cover for younger family members, where assets are to be passed down to the next generation. The costs of cover will at least in part depend on the age of the individual seeking cover, so insuring against assets within the next generation’s estate may offer savings.
The changes will be a significant concern to all but the smallest farms, and as we’ve seen from recent protests and widespread condemnation from farmers, this is an emotive issue.
It is, however, important to remember that steps can be taken to improve the position. Taking appropriate professional advice at an early stage to assess the potential liabilities and review the available options will be critical.
