Capital Gains Tax and Inheritance Tax on agricultural land and farms

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Selling or transferring agricultural land and farms can have significant tax implications, particularly concerning Capital Gains Tax (CGT) and Inheritance Tax (IHT). Given the recent speculation about whether Labour will increase these rates, if you are planning a disposal it is important to consider the current rates and the implication of potential increases.

Capital Gains Tax

Capital Gains Tax (CGT) is charged on the profit made from selling an asset, including agricultural land and farms.

• Calculation: The gain is calculated as the difference between the sale price and the original purchase price, minus allowable expenses such as legal fees and improvement costs.
• Rates: The CGT rates are 10% for basic rate taxpayers and 20% for higher rate taxpayers. On residential property the respective rates are 18% and 24%.
• Exemptions and reliefs:
  • Annual Exempt Amount: Each individual has an annual exempt amount which has been reduced over recent years to £3,000 in 2024/25 (£6,000 in 2023/24)
  • Business Asset Disposal Relief (BADR): This relief can reduce the CGT rate to 10% on qualifying business assets, including farms, up to a lifetime limit of £1 million.

Speculated changes to Capital Gains Tax

It has been speculated CGT rates could move in line with individuals marginal rate of income tax. Assuming the BADR remained at £1 million (lifetime limit) , any gains above that would suffer tax rates as high as 45%.

Inheritance Tax

Inheritance Tax (IHT) is charged on the value of an estate passed on after death. The standard IHT rate is 40% on the value above the nil-rate band, £325,000 for the 2023/24 tax year, topped up to £500,000 if you leave your home to your children or grandchildren and your total estate is valued under £2 million.

There are two reliefs that are potentially available to those selling agricultural land and farms, Agricultural Property Relief (APR) and Business Property Relief (BPR).

• Agricultural Property Relief

APR can significantly reduce the IHT liability on agricultural land and buildings. It applies to agricultural property occupied for agricultural purposes. This includes land, buildings, and farmhouses proportionate in size and character to the agricultural land.

APR can provide up to 100% relief on the agricultural value of the property if it has been owned and used for agricultural purposes for at least two years (if occupied by the owner) or seven years (if occupied by someone else).

• Business Property Relief

BPR can also reduce IHT on business assets, including farms. To be eligible the farm must be a working business, not just an investment. BPR applies to both the land and buildings used in the business.

BPR can provide 100% relief on the value of the business property if it has been owned for at least two years before the transfer.

• Combining APR and BPR

In some cases, it is possible to combine APR and BPR to maximise tax relief. For example, APR can be applied to the agricultural parts of the property, while BPR can be applied to the business elements.

Speculated changes to IHT

A number of consultations have taken place over recent years looking into IHT reform including restricting existing business and agricultural reliefs to £500,000 which would be a huge blow to family owned businesses.

With the Budget set to take place on October 30, we will have to wait and see if any changes are announced. If you are already planning to sell of gift your farm or sections of land it would be beneficial to complete this sooner rather than later.

Experts from our tax, financial services and accounting teams will be analysing the budget and will discuss the implications of the announcements for individuals and businesses in a live webinar at 9.30am on Thursday 31 October.