The new Labour Chancellor Rachel Reeves’ first Budget which she presented to the House of Commons back in October announced significant reforms to Agricultural Property Relief (APR) and Business Property Relief (BPR) from Inheritance tax (IHT).
A consultation is to be held in early 2025 which will contain further detail, particularly regarding the application of the reforms to trusts. The consultation should also present an opportunity for industry bodies to provide feedback on the reforms and, in view of the significant and widespread condemnation of the proposed reforms, it is possible that we may see some changes before the final legislation.
However, Ms Reeves seems to be adopting Margaret Thatcher’s stance as being ‘a lady not for turning’ so the farming community will need to consider the worst-case scenario and plan accordingly.
In this blog, we seek to make some suggestions as to ways that our farming clients may be able to mitigate the changes that are proposed.
Changes Announced in The Budget
Broadly, speaking, the key APR and BPR changes, effective from the 6th of April 2026, will mean:
- Those assets which currently enjoy 100% relief from APR and BPR held at death will, after deduction of the nil rate band, a £1m allowance, and spouse or charitable exemption, be subject to an effective marginal IHT rate of 20%. This rate will also apply to outright gifts (potentially exempt transfers) which are made less than seven years prior to the death, subject to taper relief. (Taper relief applies to reduce the rate of tax on death if a gift is survived by more than three years, but less than seven years.)
- Such assets settled into trust will, after deduction of the nil rate band and £1m allowance, be subject to an effective marginal IHT rate of 10%, with up to another 10% becoming due should the settlor fail to survive the gift by seven years. 10% assumes that the trustees pay the tax from the settled assets; the rate is increased to just over 11% if the settlor pays the tax due to the principle of “grossing up”.
Anti-Forestalling Rules
Anti-forestalling rules were introduced for gifts made into trust or outright to another individual on or after the 30th of October 2024 and before the 6th of April 2026. If the donor dies within seven years and on or after the 6th of April 2026, the new APR and BPR changes will apply. Although not expressly stated, it might be concluded from the introduction of the anti-forestalling rules that gifts made prior to the 30th of October 2024 where the donor dies within seven years will be assessed under the current, more generous, regime, even if the death occurs on or after the 6th of April 2026. Though, express confirmation of this point will be welcomed by taxpayers and their advisers.
A New Dynamic
Under current legislation, there is no tax benefit to making gifts during lifetime of business or agricultural assets. Indeed, there has been a CGT benefit to holding them until death. On death, the assets have passed relieved from IHT, and rebased (i.e. all historic gains wiped out) for CGT purposes. This double benefit has often been criticised either as too generous, or for disincentivising lifetime gifts.
The new regime creates a significant shift in these dynamics. This is best illustrated by looking at the possible IHT outcomes of three options:
- Holding assets until death will now result in an effective IHT charge of 20% on business or agricultural assets exceeding the £1m allowance and any nil rate band. BPR will continue to be the more comprehensive or attractive relief, for a number of reasons. Assets will continue to be rebased for CGT.
- Making an outright gift during lifetime will result in the same outcome as the treatment on death if the donor dies within seven years (although tapering of the tax after three years remains). However, if the donor survives seven years, there will be no IHT. Capital gains can often be held over on gifts of agricultural and business assets, meaning that although the gains remain capable of being brought into charge at a future date, no charge is triggered on the gift itself.
- Making a gift into trust during lifetime will result in an upfront effective IHT charge of 10% on business or agricultural assets over £1m. Any gains can be held over. If the donor survives the gift by seven years, no further IHT will become due. If they die within seven years, another 10% IHT will be due on the value in excess over £1m, making the end result the same as under scenario 1. (10% assumes that the trustees pay the tax from the settled assets; the rate is increased to just over 11% if the settlor pays).
Clearly, then, farmers and business owners are now incentivised to make lifetime gifts as the potential prize should they survive seven years is much better than paying 20% on the value over £1m and any nil rate band should they continue to own the assets until death. Outright gifts are most attractive as this should avoid IHT altogether if the gift is survived by seven years.
Trusts for these assets will become less attractive, with (after April 2026, subject to what the consultation proposes) a 10% entry charge for those who want to benefit from the longer-term protection offered by trusts (which are well suited to holding multi-generational assets), as well as an effective 3% charge every 10 years on agricultural and business assets.
Planning points
Lifetime Gifts
As explained above, generally speaking, the new regime will encourage outright gifts of APR and BPR assets.
However, where a taxpayer is elderly, and may not be expected to live beyond the 6th of April 2026, the best approach would be for them to retain their agricultural and business assets and benefit from the more generous IHT regime, and CGT rebasing.
There is a very difficult choice for older business and agricultural owners whose life expectancy is less certain. Should they survive until the 6th of April 2026, the new (less generous) regime will apply. Lifetime gifting should be considered, although this will only be successful if survived by seven years. Term life assurance might be an option to cover this risk, although this may be prohibitively expensive for older donors.
Married Couples
Once the reform has been brought in, a married couple will, between them, be able to leave £2.65m free of IHT (representing two APR/BPR £1m allowances and two nil rate bands of £325,000). If either of their estates were valued under £2m on their respective deaths, a further £350,000 of residence nil rate band (RNRB) may be available. However, when assessing whether the £2m threshold is crossed, the estate is valued before the application of reliefs or exemptions. Therefore, for most, farmers and business owners, it is likely that this threshold will be exceeded and the RNRB will not be available, particularly once pensions are brought within the scope of IHT from the 6th of April 2025.
The Government’s briefing confirmed that the new £1m allowance will not be transferable between spouses (unlike the nil rate band and RNRB). Therefore, couples should take advice to ensure that the ownership of the assets is appropriately divided between them, and that they have suitably sophisticated Wills in place, to enable each £1m allowance to be used on each of the deaths.
Individuals who have Wills with business / agricultural property gifts within them ought to have them reviewed in order to ensure that the previous formulations will work under the new regime.
Other implications of the reforms
Life Assurance
The Budget changes are likely to represent a boon for the life assurance industry. Where succession cannot take place during lifetime, life assurance may be a solution to help meet the IHT on death. Term assurance will be important to cover the risk of a death within seven years on lifetime gifts.
Implications for Agricultural Holdings Act 1986 Tenancies (AHAs)
Since 1995, it has been a common planning point for landowners to either take land “in-hand” or to replace AHAs with farm business tenancies in order to benefit from 100% APR on the freehold value of the land, rather than 50% APR. Replacing AHAs with in-hand arrangements also unlocked BPR on the land in question.
It is unlikely that replacing AHAs will be beneficial under the new regime. Assuming the landowner has other assets in excess of £1m which fall into what would have been eligible for 100% relief there will be no benefit to replacing the AHA because either way the freehold value will only benefit from 50% APR.
Indeed, maintaining the AHA will be beneficial from a tax perspective because it will depress the valuation of the freehold.
Land Values
Finally, it is possible that agricultural land values will fall in response to the reformed reliefs. A concern of the Government has been that values have been inflated by investors seeking to invest in agricultural land as an IHT-relieved asset class. If this is correct, and demand falls, one may also expect land values to fall which may go some way to mitigating the higher IHT charges post the 6th of April 2026.
If land values have fallen, taxpayers will wish to consider their CGT position and whether, if assets are standing at a loss (or more modest gain), they would prefer to make lifetime gifts at the depressed value, rather than hold assets until death where the CGT rebasing provisions will rebase the property to a lower value.
The upcoming APR and BPR changes represent a fundamental shift in inheritance tax planning for farmers and business owners. With significant implications for estate planning, asset structuring, and tax efficiency, now is the time to act. Careful consideration of lifetime gifting, trust structures, and life assurance solutions will be essential. Given the complexities, we strongly recommend seeking professional advice to develop a strategy tailored to individual circumstances and secure the best possible outcome under the new rules. Contact us today – we’re on your side!