By Helen Thomas, Chartered Financial Planner, FPC
By now, I expect everyone’s heard about the proposed changes to Agricultural Property Relief (APR), that were set out in Rachel Reeves’ first Budget. Since that day, there has been a lot written about the proposed changes, with farmers taking to the streets to protest against what is deemed an ill-thought out policy harming rural businesses.
In this article, I will set out the history of APR, why it’s an important relief for farming families and what measures can be taken to help farmers and land owners reduce the burden of Inheritance tax on their farming businesses and families.
What is Agricultural Property Relief (APR) and why is it an important relief?
Introduced in 1984, Agricultural Property Relief (APR) is designed to help prevent the forced sale of agricultural assets when passing a farm, farmland or agricultural business down the generations, allowing farmers to maintain ownership and continuity of the farm.
The relief has been set at either 50% or 100% and currently applies to Agricultural land and buildings, provided they are actively used in the business of farming; land that has been let on a farm business tenancy (FBT) for at least two years prior to death and some agricultural machinery and fixtures.
For farming families like mine, the relief has meant that we had the confidence to grow the farming business over the last 50 years, to produce more food for the Country, without being limited by a potential Inheritance tax bill. It has provided stability for farmers to grow and diversify and overcome the various challenges of producing more food to feed the growing population.
Much of the frustration that comes from the Farming industry isn’t just that the relief is being reduced but that it is being reduced to a level that impacts even relatively small scale farmers, as opposed to targeting investors looking for tax reliefs, at the same time as subsidies are being reduced, the governments of all four nations are putting additional pressure on the Agricultural Sector to solve Environmental challenges and there is continued pressure on profit by Supermarkets.
So what are the proposed changes to APR?
From the 6th April 2026:
- Relief at the rate of 100% will only be available for the first £1m of combined agricultural and business property.
- If the total value of an individual’s relivable property exceeds £1m, the allowance will be applied proportionately across the qualifying property, the allowance being split as £600,000 for the agricultural property and £400,00 for the business property.
- Once the £1m allowance is exceeded, the maximum rate of relief will be 50% which gives an effective Inheritance tax rate of 20%.
- Any unused part of the £1m allowance won’t be transferable between spouses.
The £1m allowance will apply after April 2026 to:
- Property in a person’s estate on death (it is unclear whether this will include trust assets deemed to be in an individual’s estate for IHT purposes)
- Gifts made to individuals on or after 30 October 2024 and in the 7 years before death if the death occurs on or after 6 April 2026
- “Lifetime chargeable transfers” e.g. gifts into trust – the policy paper does not state whether this applies to transfers made from 30 October 2024 or 6 April 2026
There will be a technical consultation on how the policy will be applied in early 2025, in particular, how it will be applied to Trusts such as Discretionary Trusts.
There were no changes made to the Nil Rate Band (NRB – £325,000) and Residence Nil Rate Band (RNRB – £175,000) and exemptions such as the Spousal exemption still applies. However, the RNRB will be tapered by £1 for every £2 that the estate is over £2m, so there is no RBRB once the estate exceeds £2.35m.
To put this into context, a typical farmer owning a farm on his/her own will be able to pass assets worth £1,325,000 to the next generation free of IHT on death (£1m allowance and NRB £325,000) – £2,650,000 between a married couple owning a farm together. At this level, it’s likely to impact the majority a lot of farming families who own their farmland.
Strategies to Reduce Inheritance Tax Burden
Whilst it’s possible that recent protests by Farming Unions could force the Government to reconsider elements of the policy, it’s unlikely that they will make a complete u-turn so it’s important to consider strategies to help manage this change.
Every farming business and family is different so there isn’t ‘one’ way but below I’ve outlined a few different options available:
- Early Succession Planning: One of the most effective ways to mitigate IHT is to start planning the succession of the family farm early. Gifting agricultural property during your lifetime can reduce the overall value of your estate thus lowering your IHT liability. Gifts made to direct heirs may qualify for APR, and with the potential to apply the 7-year rule (the gift will be exempt from IHT if you live for 7 years after the gift is made), there can be significant tax savings.
The ability to rebase asset values on death is lost by gifting early and thought should be put to what land is gifted and when, given that the donor cannot benefit from the gifted asset without providing ‘full consideration’ which will likely mean paying full market rent for land use.
- Use of Trusts: There is opportunity now until 6th April 2026 to settle assets worth more than £1m that qualify for 100% relief onto a new trust(s). Trusts can allow you to retain some control over the assets while ensuring they are passed to the next generation. Trust planning can also help with managing future changes to the law, offering flexibility in how agricultural property is transferred.
There are 10 yearly charges and exit charges to consider as well as annual administration requirements and as with outright gifts, the 7 year rule applies and the donor would still need to provide ‘full consideration’ for using the assets. It can complicate other parts of the farm’s administration too.
- Consider changes to the ownership structure: Given that the APR allowance is not transferrable, it makes sense to ensure full use of the £1m by both spouses/civil partners by transferring ownership of relievable assets to the extent necessary.
It may even be possible to devalue farming businesses by changing the structure of the businesses, there is a discount to value of owning 50% of a business versus 100% and so on.
- Insurance: It’s fairly common practice to take out insurance for some or all of a potential IHT liability when there is a lack of liquidity in an estate. By writing the policy into Trust, the proceeds are kept out of the estate on death, giving much needed liquidity to pay the tax due, without needing to sell assets.
Insurance premiums are largely based on the life assured’s age, health status, occupation, level of cover and term of the cover, with premiums generally being more expensive the older you are. Given this, it’s likely to be a part of a solution rather than the full solution.
Conclusion
The proposed changes to Agricultural Property Relief for Inheritance Tax could significantly impact farming families, particularly those who rely on the relief to keep their land in the family. However, with proactive planning and expert advice, farmers and landowners can still take steps to reduce their inheritance tax burden, whether through succession planning, using trusts, or diversifying business activities.
It is important for those affected to keep abreast of the latest developments in IHT legislation and adjust their strategies accordingly to ensure that agricultural properties can continue to be passed down with the minimum of tax liabilities.
