At a glance
- Without the benefit of agricultural property relief, inheritance tax can have significant implications for farm owners, potentially placing a financial burden on families looking to pass down rural properties and agricultural assets.
- Thoughtful, informed estate planning with the benefit of advice from a financial adviser can help mitigate the effects of IHT, ensuring a smoother transition of agricultural property to the next generation.
- Understanding, addressing and planning for potential inheritance tax liabilities is now especially important for farm owners.
Along with the proposed changes to most “unused” pension benefits, the impending changes to Agricultural Property Relief and Business Property Relief have grabbed the headlines. The potential impact on the farming community has been so passionately felt that many have taken to protesting in Westminster in an attempt to get their concerns heard and stir sympathy and support with the public.
So, what’s changing?
1. Agricultural Property Relief
Agricultural Property Relief (APR) mitigates the inheritance tax bill farm owners would otherwise have to pay when agricultural property is passed down to the next generation.
Agricultural property is defined in the legislation as “agricultural land or pasture and includes woodland and any building used in connection with the intensive rearing of livestock or fish if the woodland or building is occupied with agricultural land or pasture and the occupation is ancillary to that of the agricultural land or pasture.”
It also includes cottages, farm buildings and farmhouses, alongside the land occupied with them, that are of a ‘character appropriate’ to the property. The term ‘character appropriate’ depends on several factors, including whether the farmhouse is of an appropriate size to the land farmed, how long it’s been a farmhouse and if an ‘educated rural layman’ would consider it to be a farmhouse.
APR is important as, despite the potential to pay the IHT on the agricultural value of agricultural property in instalments, it can help to prevent farms potentially having to be broken up to fund a tax burden on death.
However, the proposal from April 2026, APR will be restricted. Whilst the first £1 million of combined qualifying agricultural and business property will continue to be exempt from Inheritance Tax, anything over this £1 million threshold not passing to a surviving spouse or civil partner will be taxed at an effective rate of 20% as only 50% of the surplus value will qualify for full exemption.
If the total value of the qualifying property to which 100% relief applies is more than £1 million, the allowance will be applied proportionately across the property.
Assets automatically receiving 50% relief (quoted but unlisted shares – such as AIM shares) will not use up the £1 million allowance and any unused allowance will not be transferable between spouses and civil partners (as is currently the case with personal estates and residential property). The allowance covers the following transfers:
- Property in the estate at death
- Lifetime transfers to individuals in the 7 years before death
- Chargeable lifetime transfers where this is an immediate lifetime charge, so for example when property is transferred into trust.
2. Nil Rate Band (NRB) and Residence Nil Rate Band (RNRB)
Estates will continue to benefit from the NRB, RNRB and other exemptions (such as transfers between spouses and civil partners) in addition to APR. These nil rate bands will now remain frozen until 5th April 2030 – two years longer than they were previously frozen for. Transfers to individuals more than seven years before death will continue to fall outside the scope of inheritance tax in the normal way.
Generally, under the new rules, after 6 April 2026 a farm-owning couple entitled to APR and with a full NRB and RNRB available to them would need to consider inheritance tax if the combined value of their property (including their agricultural property) exceeds £3million.
What’s the impact of the change to APR?
The fundamentals
The announced changes described above has caused concern among many in the agricultural community. In particular, those who own farms with a value that exceed the available reliefs will face significantly higher Inheritance Tax bills, potentially resulting in the need for the next generation to sell land to meet the liability which many farm owners say could, in some cases, put the viability of the farm at risk for future generations.
There are more details to emerge on the way the limitation of APR will operate including how the changes will be applied to trusts holding agricultural property and we can expect these early in 2025.
One way of providing IHT efficient liquidity to meet any liability to IHT on agricultural property could be through appropriate life assurance held in trust. The attraction of this strategy will depend on the facts of each case though.
Aside from the changes to APR at the Budget, the Chancellor also announced £5 billion to help farmers produce food over the next two years – this is the largest amount ever allocated for sustainable food production.
This is alongside £60 million for the Farming Recovery Fund which will help farmers recover from the impact of flooding. They state they are also investing £208 million in protecting the nation from outbreaks of serious diseases that threaten our farming industry, food security and human health.
What happens next?
As mentioned above, there will be a consultation (primarily on the application of the new provisions in relation to APR and BPR to trusts) in January and then draft legislation. We will then be a little clearer about the detail of how the proposed new rules will operate which will then allow planning strategies to be considered. Remember, the new rules will not come into effect until 6 April 2026.
We’re here to help you make sense of it all
We hope this article has helped to give a broad understanding of how the new rules will operate but we re-iterate the importance of the additional clarity that the results of the proposed consultation and then the legislation will deliver.
We’ll be keeping a close eye on developments and we will be standing ready to help.
Get in touch for more support and advice.
The levels and bases of taxation and reliefs from taxation can change at any time. Tax relief is dependent on individual circumstances.
Trusts are not regulated by the Financial Conduct Authority.
SJP Approved 26/11/2024