Significant changes to Inheritance Tax (IHT) announced by the new Chancellor of the Exchequer Rachel Reeves in her first Budget have caused anger and fear among the farming community. However, it is essential that we stay calm. The changes do not come into play until 6th April 2026 and there are steps that can be taken in most cases to reduce or eliminate increased IHT liabilities.
What is the present position?
An individual can claim both Agricultural Property Relief (APR) on land and Business Property Relief (BPR) on the value of their share of partnership assets or company shares
In the case of APR the land has to be owned for two years if farmed in-hand, or seven years if rented out
The property has to be used for agricultural purposes to qualify for APR, and non-agricultural value does not qualify for APR
In the case of BPR, the partnership or company has to have been trading for at least two years
APR provides 100% IHT relief, apart from land subject to a tenancy going back to before 1995
BPR also provides 100% relief, apart from certain assets owned personally by an individual and occupied by their partnership or company, in which case the relief is 50%
Once all the above conditions are met, there is no upper limit of APR and BPR that can be claimed
After APR and BPR have been deducted from a person’s estate, any balance over £325,000 is taxed at 40%. Assets given away in the seven years before death are also taken into account.
How will the Budget change IHT reliefs?
All of the above remains unchanged with one exception – there is to be a combined upper limit of £1 million for APR and BPR. Any excess will receive 50% relief. For example, a person owning £3 million of property and partnership capital will get 100% relief on the first £1 million and 50% relief on the other £2 million. This means £2 million exempt and £1 million subject to IHT.
The position then gets more complicated in the case of a married couple, as assets can pass tax-free to the survivor who can also inherit the unused proportion of their spouse’s £325,000 nil rate band. Unfortunately, the new £1 million APR and BPR limit cannot be passed to the surviving spouse, and any wills that leave all assets to the survivor may not be as tax-efficient.
As a result of these changes, farmers will need to consider making gifts of business assets earlier than they previously intended. It is important to note:
A gift more than seven years before death is exempt from IHT
A gift more than three years but less than seven years is taken into account, but the IHT on the gift is tapered
Where death occurs within three years from the gift, there is no reduction in the IHT
For this planning to be effective, the person making the gift cannot continue to benefit from the asset after the gift. This is known as reservation of benefit, and if HMRC can show this has taken place, they will calculate the IHT liability as if the asset is still owned
Life insurance will become more important for farmers wishing to protect their families from IHT liabilities. This could be a seven-year term policy, which ceases on the 7th anniversary if the gift
There will be Capital Gains Tax consequences of making lifetime gifts, as HMRC taxes them as if the property has been sold at full market value. In most cases an election can be made to defer this tax liability.
I will finish as I started by saying that it is essential that we stay calm. By planning carefully, there are actions that can be taken to improve the position so that you do not leave your loved ones with an unexpected IHT liability.
For more advice and support about IHT planning, please call 0808 144 5575 or email help@armstrongwatson.co.uk.
