In her first Budget as Labour Chancellor, Rachel Reeves announced the government's plan to impose inheritance tax (IHT) on farmers. News the government would introduce a cap on IHT relief for agricultural assets made big headlines.
Special treatment for farmers in relation to IHT has been consistently given by successive governments of both the main parties for decades. The combination of Agricultural Property Relief (APR) and Business Property Relief (BPR) has ensured the survival of family and farming businesses for the next generation after the owner's death. But the Budget altered the limits for both APR and BPR with cuts to the aggregate value of both reliefs in relation to farms and farming businesses.
From 6th April 2026, a new combined upper limit of £1 million for APR and BPR will make the estates of farmers with assets above that figure liable to pay IHT. Under the proposed changes, any figure above the £1 million threshold that does not pass to a surviving spouse or civil partner will become subject to an effective tax rate of 20% because only 50% of the surplus value will qualify for full exemption. Although IHT that is due can be paid over a ten-year period with no interest charged while instalments are being paid, that provides little comfort.
Farm owners fall into different categories. Genuine farmers operate in multiple ways to suit diverse conditions and circumstances. They are quite different from wealthy investors or absentee landlords, who acquire farmland with the primary or sole intention of using this as a means of avoiding IHT. Government forecasts, however, do not take into account the impact of proposed changes to APR and BPR.
Angered by these proposals, farmers view them as devastating for a sector that already faces significant challenges on several fronts. Long term planning for the farming sector is crucial to the nation's economy: agriculture requires certainty and farmers are justifiably angry.
The same warning was delivered by the National Farmers Union and the Country Land and Business Association: that the planned IHT changes would herald the end of UK family farming and force small rural businesses to sell their assets. Ultimately, this would undermine the nation's food security.
An outcry ensued across rural communities, which culminated in a central London protest. In an attempt to galvanise public opinion against the planned changes, more than 10,000 farmers descended on Westminster, led by Jeremy Clarkson, whose TV series has made him Britain's best-known farmer.
While the news bulletins and newspaper front pages were filled with images of tractors outside parliament, more details began to emerge about what those changes would mean in practice. Detailed analysis of the IHT changes and their impact on family farms were published by the Central Association of Agricultural Valuers (CAAV) in December.
According to the CAAV report, "up to 75,000 individual owners of farming businesses could expect to be affected over the coming generation, before considering the effect of inflation." The equivalent annual figure for 2026/27 would therefore be 2,500 taxpayers, not the 500 that was forecast by the government.
If this proves to be accurate, the government's miscalculation is significant and its impact will be much wider than forecast. Over time, the level of inaccuracy in the original estimates will become apparent. In the interim, farmers who did not consider themselves to be within the scope of the IHT changes will have to endure the Budget's devastating consequences.
Given repeated assertions by the Chancellor that relatively few farms would be affected, it seems extraordinary that government forecasts could be so inaccurate. Probate practitioners suspect it results from information supplied on death to HMRC, which does not necessarily provide the key data required.
A consultation is scheduled for January 2025, primarily on the application of the proposed changes concerning APR and BPR in relation to trusts. Thereafter, draft legislation will provide more detail, which will hopefully allow sufficient time for appropriate planning to be put in place before April 2026.
So, what can those who are likely to be affected do in order to mitigate the impact and prepare as best they can?
To reduce the impact of IHT, effective succession planning invariably matters, including spousal transfers and gifts to children. Farmers will have to consider making gifts of their commercial and agricultural assets – perhaps much earlier than they had intended. An anomaly, which could well be addressed in the legislation is that, unlike the Nil Rate Band or Residence Nil Rate amount, the government does not appear to envisage allowing the £1 million APR/BPR limit to be transferable between spouses.
Although this may change in the next Budget, the treatment of gifts for IHT and capital gains tax (CGT) remains unchanged. The rules surrounding lifetime transfers in the seven years before death still apply.
In planning ahead, timing is critical: currently, gifts made more than seven years before death remain exempt from IHT; gifts made more than three years, but less than seven years, are subject to IHT on a tapered basis, but no IHT reduction applies if death occurs within three years of the gift(s) being made. One notable exception provides a significant trap for the unwary: gifts with reservation of benefit, which limit the person making the gift from continuing to benefit from it. If they do, HMRC will calculate the IHT liability as if it was never made at all.
Life insurance will become even more important for farmers looking to protect their families from IHT liabilities. The seven-year rule also applies: a policy with a seven-year term which ends on the seventh anniversary of the gift (and tapers down after three years have elapsed) could be sufficient to cover the IHT liability. Insurance will inevitably be more expensive for older farmers, but it will usually be more cost effective than a hefty IHT bill.
There are other potential options including an expansion of the ownership of farming partnerships between multiple family members. Potentially, this increases the number of applicable £1m limits to each business. A charge to CGT may arise, however. Given that IHT changes will not apply until April 2026, there should be time to consider the precise detail. Assuming reliance is placed on making effective lifetime gifts and surviving seven years, elderly donors need to start the process sooner rather than later. For farmers of all ages, one lesson is clear: take good advice when planning ahead.
Originally published by Today's Wills & Probate.
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