Agricultural Property Relief (APR) and Business Property Relief (BPR) have long been crucial for farming families, helping to protect them from having to sell parts of their farms to pay Inheritance Tax (IHT) when the farmer passes away. These reliefs have allowed family farms to be passed down through generations without triggering a major IHT liability. However, in the Autumn 2024 Budget, the government proposed significant changes to these reliefs, which are set to take effect from 6th April 2026.
The proposed changes
The key changes are as follows:
- Each individual will be able to claim full relief on up to £1 million of qualifying assets under APR and BPR, at the full 100% relief rate
- If the total value of APR/BPR-qualifying assets exceeds £1 million, the relief will be reduced to 50%, effectively creating a 20% tax rate on the excess
- The £1 million allowance applies to property held in an estate at death, lifetime transfers (including failed Potentially Exempt Transfers or PETs) within seven years before death, and chargeable lifetime transfers (such as transfers into trust).
- The £1 million allowance is not transferable between spouses
- Trusts created before 29th October 2024 will each get their own £1 million allowance, and lifetime transfers made after 29th October 2024 will also be subject to the new rules if the donor dies after 6th April 2026
These changes are expected to have a significant impact on many family farms, which are often asset-rich but cash-poor. Many in the farming community have voiced concerns, especially older farmers who fear the changes could threaten the future of their farms.
Example of the impact
Let’s look at an example of how these changes could affect an unmarried farmer. Jack has assets worth £5 million, all of which qualify for APR/BPR, and he has not made any lifetime transfers.
Under the current rules, Jack’s estate would pay no IHT because of the full relief under APR/BPR. However, under the new rules, with a full Nil Rate Band, Jack’s estate would be liable for IHT of £670,000. Given that Jack’s heirs are unlikely to have the cash to pay this amount, they would likely need to sell part of the farm to cover the tax bill. Although the tax can be paid in instalments over ten years, with most farms having low annual profits, it could be very challenging to find the funds, making it likely that land would need to be sold to settle the debt.
IHT planning considerations for farmers
There are several potential strategies to reduce the impact of Inheritance Tax (IHT) on a farming estate, such as spousal transfers, gifts to children, life insurance, and taking advantage of Agricultural Property Relief. However, tax rules can be complex and subject to change, so it’s advisable to consult with a professional advisor to explore the best options for your circumstances.
Next steps
We don’t yet have the full details of the legislation, as the government plans a technical consultation in early 2025, so the proposals could still change. In the meantime, farmers should consider the potential impact of these changes on their estates and begin planning accordingly.
It will be important to review potential IHT liabilities, update Wills, and explore options for minimizing the overall family tax burden. With various strategies to consider, it’s essential to seek expert advice tailored to your specific situation. Every family farm is different, and the best course of action will depend on individual circumstances.
So, if you have any questions about any of the topics covered in this article, reach out to one of our experts here at Gravita.
