Rachel Reeves’ first budget as Chancellor brought widespread change to a variety of communities, with farmers among the most impacted.
Dan Pegg, one of the senior directors in our Agriculture team, breaks down what farmers can expect as part of the changes.
In the 2024 Autumn Budget, Chancellor Rachel Reeves announced significant reforms to the inheritance tax (IHT) system, which directly impact the agricultural sector. These changes, due to come into effect from April 2026, will adjust how Agricultural property Relief (APR) and Business Property Relief (BPR) apply to farming estates.
Farmers should begin considering proactive strategies to mitigate the potential tax liabilities resulting from these changes.
The Introduction of a £1m IHT Allowance
The government will implement a combined £1 million allowance for assets qualifying for 100% APR and BPR. This means the first £1 million of agricultural and business property can be inherited tax-free. For assets exceeding this threshold, the relief rate will decrease to 50%.
Currently, qualifying agricultural and business assets benefit from 100% relief. Under the new rules, while the first £1 million will still receive 100% relief, any value above this will only qualify for 50% relief an effective rate of 20%.
The existing nil-rate bands remain tax-free for the first £325,000, rising to £500,000 if the estate includes a residence passed to direct descendants, and £1million when a tax-free allowance is passed to a surviving spouse or civil partner.
Mitigating the Impact of Inheritance Tax
While the new reforms will affect farmers with estates valued over £1 million, there are several strategies that can be employed to reduce IHT liability and protect family farms for future generations.
Early Succession Planning
Transferring assets during your lifetime can significantly reduce the value of your estate and lower the potential IHT burden. If the transferor survives for seven years after making the gift, the asset is exempt from IHT. This is particularly relevant for farmers wishing to pass on the farm to the next generation.
Utilising Trusts
Placing farm assets into a trust can be another way to mitigate IHT. Trusts allow for the transfer of assets to future generations while potentially reducing the estate’s overall value, especially when assets qualify for APR or BPR. Careful planning is needed to structure the trust appropriately and comply with IHT rules.
Ensure Land Qualifies for APR and BPR
Regularly reviewing the status of your assets and ensuring they qualify for APR and BPR is crucial. The new £1 million threshold means it’s more important than ever to keep your estate’s tax position up to date. Consideration could be given to restructuring the farm or business to ensure that assets continue to qualify for these reliefs.
Environmental and Conservation Agreements
From April 2025, land managed under government environmental schemes will qualify for APR. This change can provide an additional route for mitigating IHT liabilities, so it may be worth considering entering such agreements and keeping proper documentation of any changes to land use.
Regular Estate Valuations
Regular valuations of your estate’s assets are important to understand their potential IHT exposure. Staying on top of asset values will allow for more effective planning and help inform decisions about gifting, trust creation, or restructuring your estate.
So, in summary…
While the changes to IHT in the 2024 Budget will impact farmers, particularly those with estates valued over £1 million, there are various strategies available to mitigate the effects. By utilising early succession planning, trusts, and ensuring land qualifies for APR or BPR, farmers can reduce the potential tax burden and secure the long-term future of their farming businesses. Consulting with legal and financial professionals who specialise in agricultural estates is essential to navigate the complexities of IHT planning and implement a strategy tailored to your needs.
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Disclaimer
The contents of this blog or any other published by Talbots Law cannot be considered as legal advice. You should take no action without prior consultation with a qualified solicitor or legal professional.
