Many of you will have already seen our Wheelers Words which highlights, as an overview, the changes announced in yesterday’s Budget. However, the impact for businesses, and in particular the farming sector, is significant.
The announcements confirmed that Business Property Relief (BPR) and Agricultural Property Relief (APR) will be subject to a combined £1m cap of 100% relief with amounts in excess of this only benefitting from relief at 50% from April 2026. Although the Chancellor announced in the Budget that it would help protect small farms, with average land values approaching £10,000 per acre, this only equates to 100 acres of land.
As an example, if we take a 600-acre farm with a value, of say, £6m then the increase in the Inheritance Tax from what was zero will now equate to £1m. This tax would need to be paid within six months of the date of death or via instalments over a 10-year period, this latter route will attract interest.
Continuing with the example, to borrow £1m, even on an interest only basis, is going to incur interest charges somewhere in the region of £70,000 each year if finance could be obtained at a rate of 7% per annum. If the £1m was paid over a 10-year period then, even excluding interest, it would bring a burden on the business of over £100,000 each year. For many farms and businesses this could simply make the business unviable as in many instances this liability could well exceed the cash profits being generated.
It is likely that based on the above, farmers and business owners will be considering their position before these measures are introduced in April 2026 and it is likely that we will see a significant amount of assets moving either down the generations or into Trust to try to benefit from the current reliefs. From first reading of the proposed legislation, it is clear that there will be various measures put in place to limit such planning. They have already made it clear that although Trusts settled before 30 October can each benefit from the £1m allowance, this £1m allowance will be shared in some form between all settlements created by the same settlor after 30 October, as well as the settlor’s estate. It is also likely that the new rules will apply for life-time transfers on or after 30 October 2024 if the donor dies on or after 6 April 2026, thus preventing forestalling.
The guidance also indicates that the Government will publish a Technical Consultation in early 2025 which will focus on the detailed application of the Allowance to Lifetime Transfers into Trusts and the charges on Trust property.
The above changes are likely to force many businesses to sell land to pay Inheritance Tax liabilities. This, coupled with the significant changes in the industry at the moment, with the changes to subsidies as well as the pressures that all businesses will now face following the impact of National Insurance rises and National Minimum Wage increases, paints a stark picture for UK agriculture.
The one marginal consoling factor is that there has been no announcement thus far to remove the rebasing of assets for Capital Gains Tax purposes on death. Therefore, the market values of an individual’s assets on their death will, at this time, continue to constitute the Capital Gains Tax base cost of said assets for the recipient beneficiaries. As such, where businesses are thinking that they may need to sell assets to pay Inheritance Tax liabilities, you may wish to consider what assets you are willing to sacrifice ahead of time, and how these assets are owned, to minimise Capital Gains Tax liabilities arising on the sale of these assets to fund the Inheritance Tax liabilities.
The need to plan and consider the long-term strategies has never been as important as it will be over the next 18 months. All farms and family situations are different, and it will not be a one-solution-fits-all scenario.
The consideration of the Inheritance Tax will also need to take into account the changes that have been made to pensions. For many, the pension may also represent land holdings or holdings of commercial premises which are critical to the business operation.
The changes outlined above represent the most significant changes to the taxation of UK agriculture in a generation and I fully expect that the CLA and NFU will add significant pressure over the coming months as the impact of the changes are fully considered.
The impact of these reforms will be wide-spread and will take time to develop fully. The impacts are likely to have wide-reaching implications, not least on the underlying land values but also the extent to which environmental schemes are taken up if there is a risk hanging over the farm that land may need to be sold to meet Inheritance Tax liabilities. The announcements in the coming Spring are also likely to cover how, if any, differences will be treated regarding the rates applicable to land which is farmed in-hand versus those that are let, as well as the impact on old Agricultural Holdings Act tenancies, plus other assets used in the business but owned personally.