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Impact of Inheritance Tax Changes on UK Businesses and Farmers

In the Autumn Budget, the Government introduced reforms to agricultural property relief (APR) and business property relief (BPR) on Inheritance Tax (IHT).

These changes will affect how agricultural, and business assets are passed down through generations. Currently, APR and BPR offer 100 per cent IHT relief on agricultural property and qualifying business assets, with no cap.

However, the new legislation introduces a threshold. Estates will still receive 100 per cent IHT relief on the first £1 million of combined business and farming assets, but amounts above this will be taxed at 20 per cent, payable over 10 years interest-free.

Reasons for the Tax Changes

Daniel Zeichner, Minister for Food Security and Rural Affairs, explained that the new rules aim to prevent wealthy landowners from using APR to avoid IHT.

He believes that rural communities would benefit from a fairer system, with improved public services. The Chancellor, Rachel Reeves, also stated that the new measure would protect small family farms, with three-quarters of claims remaining unaffected.

Impact on farmers

Farmers may be able to avoid the new tax by transferring property at least seven years before death.

Combining the nil-rate band allowances with the new tax relief restrictions means an individual could pass on up to £1.5 million tax-free, and a couple could pass on up to £3 million tax-free.

However, there is concern that medium-sized farms, which are asset-rich but cash-poor, may struggle to pay the tax without selling land or business assets.

According to the Chancellor, 72 per cent of farms won’t be affected by the new tax rules. The Treasury estimates that 500 farms per year will pay more tax based on previous annual claimants of APR. However, farming unions argue this is an underestimate.

The National Farmers Union (NFU) cites that around two-thirds of farms are worth over £1 million and will be affected by the new tax changes, more than the Government’s estimate.

Take action

The Government introduced reforms to APR to prevent its misuse by wealthy landowners.

However, family farms might be unintentionally affected by these changes. Critics argue that the new system is overly simplistic and doesn’t differentiate between those exploiting the system and those genuinely running farms.

“Future asset protection will likely involve careful planning to optimise nil-rate band allowances and possibly an increase in lifetime gifts to transfer assets IHT-free at least seven years before death”, says Emma Sommerville, a Senior Associate in our Wills and Probate team.

If you believe these changes will affect you, consult a financial advisor or probate expert knowledgeable about the recent changes to guide you on the best course of action.