On 30 October, Chancellor of the Exchequer Rachel Reeves delivered her much anticipated budget, bringing in a raft of changes with the aim to raise a staggering £40 billion in additional revenue.
While Reeves sought to fulfil her promise to keep tax hikes away from workers’ payslips, she delivered sobering news for farmers, businessowners, and landowners across the country.
For decades, Agricultural Property Relief (APR) and Business Property Relief (BPR) have enabled farmers and businessowners to pass their family business to the next generation without any Inheritance Tax (IHT) charge, with such individuals often enjoying 100% relief from IHT on qualifying business and agricultural assets under the current regime.
What are the proposed changes?
From April 2026, the existing rate of 100% relief will continue for the first £1 million of combined value of most agricultural and business assets. Values above this cap will see the relief reduced to 50%, resulting in an effective rate of tax on these assets of 20% (to the extent that they are not otherwise exempt or covered by the nil-rate band).
Where the total value of such assets within an estate is over £1 million, this new allowance will be applied proportionally across the qualifying property between APR and BPR – a distinct shift from the current regime where APR takes priority.
The £1 million allowance will impact all IHT-related events, including:
- death;
- chargeable lifetime gifts; and
- ten-year charges applying to trusts.
The new allowance cannot be transferred between spouses and civil partners.
The allowance will also be available for use by trustees, with trusts settled before 30 October 2024 having their own allowance and trusts settled on or after 30 October 2024 with the same settlor sharing a £1 million allowance amongst them.
Why is this controversial?
The government have expressed their view that the proposed measures will “help to protect family farms and businesses” but the suggestion that most farms across the country are not worth over £1 million and will not be impacted by these changes is perhaps oversimplistic and optimistic.
Firstly, while there may be many farms and businesses worth less than the threshold, there will be a significant number of farms and business worth more. Secondly, farms and businesses may be “asset-rich” but “cash-poor” and so extracting value to settle an IHT charge could prove rather difficult, leaving many worried that portions of the farm or business will have to be sold off to raise the required funds.
On the basis that such assets are often seen as “family assets”, many farmers and businessowners have perhaps not focussed on the potential capital value of their assets, safe in the knowledge that they will pass them on to their families on their death free of IHT, irrespective of value. It will now be critical that families take stock of their assets and consider whether any succession planning is required to minimise the impact from the proposed measures.
What steps can farmers and business owners take?
While the new rules undoubtedly present a challenge to farmers and other business owners, for many potentially impacted individuals and trustees there may be options to mitigate potential exposure.
As such, the first step in each case should be to review existing arrangements with a view to decide on a strategy to manage (and hopefully reduce) exposure. Impacted individuals may wish to consider steps to transition assets to a younger generation, the utilisation of trusts, or life assurance to cover potential costs.
In making decisions on any action, affected individuals will need to consider the mitigation of not only IHT but also factors such as the affordability of gifts, the potential of exposure to capital gains tax in giving assets away, and other “commercial” factors in passing on ownership of business assets.
Affected individuals should also take note that in some cases action may need to be taken by April 2026 to have the full range of options available.
The government predict that almost three-quarters of estates claiming APR and the majority of estates claiming BPR in 2026/ 27 will be unaffected by these reforms. While that may be the case, the shadow of worry cast across British farms and businesses in the last week will affect a far greater number.
To alleviate this anxiety, it is important that families review their affairs and put in place succession plans to manage any potential IHT liability that may now be faced under the revised rules.