As the Chancellor came to the latter stages of her Autumn Budget 2024 speech, she announced:
From April 2026, the first £1m of combined business and agricultural assets will continue to attract no inheritance tax at all, but for assets over £1m, inheritance tax will apply with 50% relief, at an effective rate of 20%. This will ensure we continue to protect small family farms and three-quarters of claims will be unaffected by these changes.” In addition, she reduced relief on AIM shares to a flat 50% with no 100% portion available.
Checking back to my pre-Budget guesses a potential cap on APR & BPR was on the list, but I would never have guessed the cap would be set so low. Rapid calculations at the time suggested that almost all of our farming clients would be facing roughly 20% tax on a significant slice of their assets. This will be a huge charge for many farmers, who are ill-equipped to fund it. The £1m isn’t intended to be transferable, and so nearly every farmer who has a living spouse will need to rewrite their Will.
Since 1992 most forms of agricultural and business property have attracted 100% relief from inheritance tax. Prior to the Budget therefore, the best advice for 30+ years has often been that farmers and other business owners should ‘die in the saddle’. This meant not only that there was minimal inheritance tax on death, but also the capital gain uncrystallised in the business assets would be washed out, giving the next generation a fresh start.
This relief from taxing generational businesses has been a big benefit to them, as they have been able to invest funds in their businesses that otherwise they might have been putting to one side to meet liabilities on their death. If you are considering whether to build a reservoir or grain store, projects with a pay-back period of many years, it is much easier to do so if you are not also having to make provision for your heirs to pay a percentage of that in inheritance tax when you die. It has therefore promoted investment and helped create jobs. This accords with the stated policy of HMRC that these reliefs help ensure businesses do not have to be sold or broken up following the death of the owner.
However, in addition to businesses and farms benefiting from these reliefs, a number of people have taken the opportunity to invest in business property in their latter years as an excellent way of minimising inheritance tax. AIM shares in particular have been popular, because of the ability to spread risk across a portfolio, and qualify for relief in only 2 years. By way of comparison, a similar “passive” investment in letting farmland would take 7 years to achieve 100% relief.
| Full estate | £2,000,000 |
| Less 100% relief on £1,000,000 | £(1,000,000) |
| Less 50% relief on £1,000,000 | £(500,000) |
| Balance of estate | £500,000 |
| Less NRB & RNRB | £(500,000) |
| Liable to IHT@40% | 0 |
There has been a lot of disagreement about this. The Government initially said 500 claims to agricultural relief per year, which equates to about 15,000 IHT returns in a generation of 30 years.
In a recent paper, Dan Neidle of Tax Policy Associates estimated that c.258 farming estates each year are likely to actually pay more tax as a result of these changes (perhaps a little under 8,000 a generation). His paper accounts for the above figures, as well as the fact that people are very likely to take other routes to mitigate inheritance tax. However, he recognises that the estates paying tax is a different figure from the number impacted by the change, and certainly different from those worrying about being affected, now or in the future.
The CLA estimated that 70,000 farms might have to pay tax in the future, looking at DEFRA figures, farmland values and including business assets. The CAAV estimates the total figure at 75,000 taxpayers affected (or 2,500 a year), accounting for agricultural and business property over £1m.
Key to this is when a person is “affected”. If there’s a pile-up on the M4 there may be only a few people involved in the accident, but many thousands of drivers will be affected. Even if you end up not paying tax, you may only be able to achieve that by engaging a combination of land agents, accountants and solicitors to work in reviewing your Wills, making early gifts, redrafting partnership deeds, refinancing arrangements with the banks, restructuring your business, etc. I feel it would be a bit disingenuous to tell someone who has paid thousands of pounds in professional fees that the change in rules hasn’t affected them.
On balance I think it is reasonable that we should expect around 75,000 people to be urgently looking to do something about their inheritance tax because of this change.
Farming is an unusual case in that for many people the land they farm has a high asset value, but the rate of return on capital is often much lower than for other forms of businesses.
A manufacturing business worth £5m might generate a 6% return on capital, but a farm worth £5m might only generate a 1% return on capital. This means that it can be extremely difficult for farms to find the cash to fund the tax liability that it is proposed will apply to the business passing on death.
Farmers have been told by both Conservative and Labour Governments for the last 40 years that so long as they invest back into the farm, they will be able to pass it down without tax charges. To be suddenly told they need to accumulate a significant fund to pay inheritance tax, often for people who will have no opportunity to earn that money, is a huge hit to them.
I have spoken with people whose families have been farming land for generations or even centuries who are now worried that they have no time to plan for a charge that will force them to sell part or all of their farm.
Some will already have existing borrowings and simply cannot fund the tax without selling a large slice of land. This problem can be exacerbated by lenders seeing a drop in farm values (land agents have suggested 10% to 15%) and requiring that existing borrowings are paid down, making things even tighter. A tax bill of 10% of the farm value could trigger sales that see the farm significantly reduce in size, and risk becoming unviable as a result.
Farmers’ desire to pass a commercial business to their children as generations have done before them is being put at risk because of this change to the IHT rules.
The Government’s 2024 Policy paper on reform of APR and BPR explains that they are seeking to better target the reliefs, as it is not fair for a very small number of claimants to claim such a significant amount.
There has also been a push to prevent tax avoidance through the use of these reliefs, with a small number of wealthy individuals being highlighted as making some very large investments in agriculture. It is felt that a person should not be able to divert their wealth into a farming business, achieve inheritance tax relief, and then their heirs sell the whole lot shortly after the death, tax free.
The problem with this policy is that it seems to be targeted not at the tax avoiders, but on family farms.
Consider three people:
The policy seems to attack the farmers it should protect, and protect the people it should tax.
Practitioners and commentators have suggested some alternatives to the proposal, including:
Steve Reed, Secretary of State for Environment, Food and Rural Affairs has said “if farmers check the facts they’ll see this change is fair and proportionate for everyone.” The Times reported that in a recent meeting between the President of the NFU and Keir Starmer “the prime minister took the opportunity to have a constructive conversation with Mr Bradshaw about why we believe the changes are the right approach.”
At the moment it does not seem there is much appetite in Government for any change.
It seems likely this is the beginning of a long process. Farmers are facing a combination of IHT changes, reduction in delinked payments, carbon taxes on fertiliser, a freeze on environmental grants and more, and then being told by the Environment Secretary “farmers must do more with less.” Temperatures are running high.
Whether it is tens of thousands gathering in Whitehall, or tractors blocking Dover or Holyhead, it seems certain this is just getting started. Only time will tell where these proposals end up.
Figure 1: Clara the Farmer
| Clara, the farmer | Total | APR | BPR | No relief | |
| House | 500 | 350 | 150 | ||
| Land | 3,400 | 3,500 | |||
| Business assets | 1,000 | 1,000 | |||
| 5,000 | 3,850 | 1,000 | 150 | ||
| 100% relief | -1,000 | -794 | -206 | ||
| 50% relief | -1,925 | -1,528 | -397 | ||
| IHTable Estate | 2,075 | 1,528 | 397 | 150 | |
| Less NRB | -650 | ||||
| Liable to IHT | 1,425 | ||||
| IHT @ 40% | 570.0 |
If you have any questions or concerns, please contact Stuart Maggs ([javascript protected email address]) for further information.
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