Written by Matthew Yates, Partner and Joint Head of the Private Client team, Hunters Law LLP
The government’s plan to impose inheritance tax (IHT) on farmers has made big headlines. On 30th October, Labour Chancellor Rachel Reeves announced in her first Budget that the government would introduce a cap on inheritance tax relief for agricultural assets.
Farmers have received special treatment in relation to IHT from successive governments. Agricultural Property Relief (APR) and Business Property Relief (BPR) have ensured the survival of family and farming businesses after the owner’s death. This year’s Budget introduced changes to APR and BPR specifically in relation to farms and businesses, announcing cuts to the aggregate value of both reliefs.
In practice, a combined upper limit of £1 million for APR and BPR will make farmers with assets worth more than that figure liable to pay IHT from 6th April 2026. Anything 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 under the proposed changes, only 50% of the surplus value will qualify for full exemption. Any IHT that is due can be paid over a ten-year period. Although no interest is charged while instalments are being paid, that provides little comfort.
Genuine farmers operate in diverse ways to suit multiple conditions and circumstances – quite different from wealthy investors or absentee landlords who buy farmland with the primary intention of avoiding IHT. But government forecasts of the impact of its changes to APR and BPR fail to take this into account.
Farmers have been in uproar, viewing the changes as devastating for a sector that already faces multiple challenges. Long term planning for the farming sector is crucial to the nation’s economy: agriculture requires certainty and farmers are justifiably angry.
The National Farmers Union and the Country Land and Business Association delivered the same warning: the planned IHT changes would herald the end of UK family farming, forcing small rural businesses to sell their assets, which would undermine the nation’s food security.
A public outcry ensued across rural communities, culminating in a London protest, symbolically led and championed by Jeremy Clarkson, whose documentary series has made him the best-known farmer in Britain. Designed to galvanise public opinion to oppose the planned changes, more than 10,000 farmers descended on Westminster.
In parallel with images of tractors outside parliament, more details emerged about the substance of what those changes would mean in practice. In December, the Central Association of Agricultural Valuers (CAAV) published details of its analysis of the IHT changes and their impact on family farms.
This revealed that tens of thousands of individual owners of farming businesses could be affected by the IHT changes.
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 forecast by the government.
If this is accurate, then a substantial government miscalculation will have a significant impact. Time will enable us to evaluate just how inaccurate the original estimates have been and the Budget’s
devastating consequences for farmers who did not consider themselves to be within the scope of the IHT changes.
Given the Chancellor’s repeated assertions that relatively few farms would be affected, it is unclear how government forecasts could have been 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 will take place in January 2025, primarily on the application of the proposed changes concerning APR and BPR in relation to trusts. Draft legislation will then provide more detail which will hopefully allow sufficient time for appropriate planning to be implemented prior to April 2026.
So, what can those affected do to mitigate the impact and prepare as best they can?
Effective succession planning lies at the heart of potential strategies to reduce the impact of IHT, including spousal transfers and gifts to children. Perhaps much earlier than intended, farmers will have to consider making gifts of their commercial and agricultural assets. An anomaly which may well be addressed in the legislation is that the government does not appear to envisage allowing the £1 million APR/BPR limit to be transferable between spouses, unlike the Nil Rate Band or Residence Nil Rate amount.
Fortuitously, the treatment of gifts for IHT and capital gains tax remains unchanged, although this may change in the next Budget. The rules surrounding lifetime transfers in the seven years before death still apply.
In planning ahead, several factors must be considered in relation to time: gifts made more than seven years before death currently 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. A notable exception applies which provides a significant trap for the unwary, known as gifts with reservation of benefit: the person who makes the gift cannot continue to benefit from it, otherwise HMRC will calculate the IHT liability as if it was never made at all.
For farmers seeking to protect their families from IHT liabilities, life insurance will become even more important. Again, the seven-year rule applies: taking out 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. Although insurance can be particularly expensive for older farmers, it will usually be more cost effective than a large IHT bill.
Other potential options include expanding the ownership of farming partnerships between multiple family members, potentially increasing the number of applicable £1m limits to each business. But a charge to CGT may arise. 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.
