As expected, the first Labour budget since 2010 included some changes to Inheritance Tax. Our Anna Stephenson’s article The Autumn 2024 Budget: IHT – What does this mean for me? Rather helpfully provides an overview of the key changes.
One aspect, that has seen an outcry from farmers since the publication of the budget, relates to the Inheritance Tax relief, known as Agricultural Property Relief (APR). APR previously allowed the majority of farming assets to pass on death of the owner, entirely free from Inheritance Tax and, following the budget will now be reformed. The change also affects the relief to business assets (Business Relief) which has been useful to working farms up to this point.
This article provides an outline of the changes and aims to help farmers to understand just how these changes will affect them (if at all) and, options that they might have, to manage the Inheritance Tax liability that they had not previously expected a need to consider.
What are the new rules?
The key take away is that the 100% relief that farming property previously benefitted from, will be restricted to the first £1million pounds worth of qualifying business and agricultural assets. Thereafter, farming assets (and/or business assets) will still benefit from the relief, at the rate of 50%. Therefore, there will be farming families who now must consider how Inheritance Tax will be paid, to allow the farm to remain within their family.
Unused allowance will not be transferable between spouses in the same way as the current Nil Rate Bands are. For an overview of the Nil Rate Bands, see our article on Making the Most of our Inheritance Tax Reliefs for more information.
The inability to transfer the new £1 million limit between spouses means that it is more important than ever for families who own agricultural assets (or business assets) to ensure that they carry out Estate Planning in order that they may use the most of their individual reliefs.
It is likely that we will see a move away from the traditional approach of all assets passing between spouses on the first death. Individuals may opt to pass any assets that will benefit from these reliefs, directly to the next generation, or into a Trust on the death of the first of them. The aim, to ensure that they can both make the most of their £1 million limit.
Will this impact all farming property?
According to gov.uk “Almost three-quarters of estates claiming agricultural property relief and the majority of estates claiming business property relief in 2026 to 2027 are expected to be unaffected by these reforms“. Therefore, it is expected that this change will have an impact on only the most high value farms.
One difficulty that those affected will face is that typically, much of the wealth of a farming family, is tied up in farming assets. The sale of such assets, to fund Inheritance Tax, could have a huge impact on working farms and their ability to continue to run successfully, following the death of the legal owner.
What can I do?
Review your Will and make sure that it makes the most of the tax free allowances of all parties. For example, passing your farming assets to your children, or into a Trust, rather than to your spouse.
Think about making gifts to the next generation during your lifetime. All Estates will still benefit from lifetime gifts falling outside of their Estates should they survive for more than 7 years from making said gift.
Be careful, the £1million allowance may be used up (or partially so) by gifts being made in the 7 years prior to the death of an individual. Gifting will remain an important tool in Estate planning, whether directly or otherwise, however, individuals must plan more carefully than they previously would have, when gifting agricultural assets.
Gifting into Trusts will no doubt also remain a popular means to manage the IHT liability of any family, including those of farming families. If it is important such a gift does not transfer directly to the next generation, just yet, a Trust can be an exceptionally useful tool to be able to deal with this.
Trusts are subject to Inheritance Tax under certain conditions. However, Trusts will also benefit from a £1million allowance in respect of qualifying agricultural property (the limit being £325,000 for Trusts with none Agricultural/Business assets) which will not be taxable to Inheritance Tax. The Inheritance tax treatment of Trusts are complicated, but it is useful to know that farming assets retain some favourable treatment in this regard.
Please do be mindful that Trusts that are already in place, and that contain Agricultural Property, may be effected by the change, even if they were established prior to the budget.
What else do I need to know?
The tax free allowances available to all individuals will remain relevant to those with agricultural property as mentioned above. Thus, spouses, who pass their main home to their direct descendants, will be able to pass £1 million plus and additional £1 million (each) of qualifying business and agricultural assets, free from Inheritance tax on their death.
Further, any IHT liability that may be relevant to Agricultural Property (and Business Property alike) can be paid in instalments, over a 10 year period (subject to certain conditions).
With the above in mind, we hope, that with careful and consistent planning, families will still be able to pass farming assets on to the next generation and allow them to continue their invaluable work and to pass down their legacy.
We would urge anyone to seek advice ASAP, the implementation of the change from April 2026 will soon be upon us and planning (which can sometimes take some time) should be carried out before this date.
Contact us for further information.
