Chancellor Rachel Reeves has delivered Labour's first Budget since 2010, after the party's return to power in July 2024's general election. Rachel Reeves announced major changes to Inheritance Tax (IHT) during the Autumn Budget in October 2024 which will have a significant impact on people who own high-value estates, are business owners, and farmers. These changes aim to address wealth inequality while preserving reliefs for middle-income families. Below is an overview of the major reforms to IHT and their implications, with a focus on the agricultural sector.
Key Changes in Inheritance Tax
Freezing of Tax-Free Thresholds: The nil-rate band remains at £325,000, frozen until April 2030. The residence nil-rate band stays at £175,000 for estates under £2 million. Together, individuals can pass on up to £500,000 tax-free, or £1 million for couples to their children or direct descendants. However, due to rising property and asset values, more estates are likely to be subject to IHT, effectively increasing the tax burden on many families especially within the middle class in British society.
Progressive Tax Rates for Wealthier Estates: Estates between £2 million and £5 million will face a tax rate of 42%. Estates exceeding £5 million will be taxed at 45%.
Reforms to Business and Agricultural Property Relief (APR): From April 2026, only the first £1 million of qualifying agricultural and business property will qualify for 100% relief. Any excess will receive only 50% relief, resulting in an effective tax rate of 20% on surplus assets.
Changes to Pensions: The IHT exemption on pensions will end in April 2027, meaning beneficiaries could face income tax on inherited pensions, with overall effective taxes as high as 67% in some cases?.
Implications for Farmers
Farmers in the UK face unique challenges under the new IHT framework:
Reduction in Agricultural Property Relief (APR):
Before the reforms, APR allowed up to 100% IHT relief on qualifying agricultural land and buildings regardless of their value. This relief was actively used by farmers and their families for agricultural businesses ensuring that farmers could hand down their business to their children or direct descendants who would ensure continuation of the farming business without the IHT burdens and tax implications.
From the 6th April 2026, farmland owners will only be able to claim 100% APR relief from IHT which is restricted to the first £1 million of combined agricultural and business property. Above the £1million threshold, landowners will access 50% relief from inheritance tax and will pay inheritance tax at a reduced effective rate up to 20%, rather than the standard 40%.
This tax can be paid in instalments over 10 years interest free, rather than immediately, as with other types of inheritance tax. This is on top of all the other spousal exemptions and nil-rate band exemptions that individuals can access in order to mitigate the IHT payable. This means that two people with farmland, depending on their circumstances, can pass on up to £3 million without paying any inheritance tax. This is an assumption based on the £1 million limit combined with the use of the nil-rate bands and does not take into consideration the specific circumstances of each estate that may affect the tax calculation.
Although the Government has stated that most estates shall not be affected by these changes as full IHT exemptions for transfers between spouses and civil partners continue to apply. This means that any agricultural and business assets left to a spouse or civil partner will be exempt from IHT.
Following the death of a surviving spouse (on second death), an estate can pass on £1 million free of inheritance tax if they leave their residence to direct descendants. This includes children or grandchildren. This is the residential nil rate band exemption still available.
Any transfers to individuals more than seven years before death as gifts will continue to fall fully outside the scope of inheritance tax. The effective rate of tax paid on the gift tapers down from 3 years after the transfer depending on circumstances (3 to 4 years – up to 16%; 4 to 5 years – 12%; 5 to 6 years – 8%; 6 to 7 years – 4%). The existing taper relief (reducing IHT for gifts made within 3-7 years before death) remains unchanged, providing some level of continuity and respite.
For large farms, particularly in more affluent areas with higher property valuations, this change could result in significant tax liabilities on land and property exceeding the IHT exemption thresholds explained above. Many farmers have expressed concerns about the viability of passing down family farms to the next generation without liquidating assets? due to the removal of the APR relief and limitation to just £1million.
Impact on Rural Communities:
The reforms may discourage younger generations from continuing family farming traditions, potentially disrupting rural economies and food supply chains. Some farming unions have called for exemptions or adjustments to ensure the agricultural sector remains sustainable.
Need for Early Planning:
Farmers are advised to consult tax and estate planning professionals to explore solutions such as restructuring ownership, diversifying assets, or establishing trusts to mitigate the tax burden.
Estate Planning is Crucial:
These changes highlight the need for comprehensive estate planning. Individuals with business or agricultural assets must proactively reassess their inheritance strategies to minimise the potential IHT tax implications on their estate after they pass away. Various industry groups, including farmers' unions and tax reform advocates, are calling for more targeted relief for essential sectors like agriculture. The government has hinted at further IHT reviews in the 2025 Spring Budget, leaving room for potential revisions in the future.
Conclusion
The 2024 IHT reforms presents challenges to both farmers and business owners who must now navigate their estates and plan for the future considering the significant changes to the IHT relief thresholds introduced. Middle-class families may face growing tax liabilities and the best solution would be to consider early and strategic planning to mitigate the effects of the new thresholds introduced, especially for those in the agricultural sector.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.