October 31, 2024
Article
It was incredibly disappointing to listen to the Budget yesterday and hear that the government are driving ahead plans to reduce inheritance tax (IHT) reliefs for businesses from April 2026 without any consultation. The impact on the agricultural sector and family businesses will be huge, with the Country Land and Business Association (CLA) confirming the changes will impact 70,000 farms in the UK. In addition to this, there will be a significant knock-on impact to the wider rural and business communities.
Currently trading businesses can qualify for up to 100% relief from IHT with business property relief (BPR) and property occupied for the purposes of agriculture can qualify for up to 100% agricultural property relief (APR).
The measures announced in Rachel Reeves’ Budget mean that from April 2026 the reliefs will be subject to a combined cap of £1M for 100% relief per estate with the £1m allowance not being transferable between spouses. Value over £1M will only benefit from 50% relief, effectively a 20% tax charge on businesses and agricultural property values in excess of £1M.
The Chancellor claimed that the £1M allowance would protect small farms. However, this is only likely to be sufficient for a 50-acre smallholding with average farm sizes around 220 acres. The measures will result in the need for costly and time-consuming valuations of stock, tillages, plant and machinery, and goodwill which will all eat into the £1M allowance. This will require knowledgeable resource at HMRC to agree these complex valuations.
If we take a 500 acre farm the annual cost of funding the IHT bill on death over the following 10 years would be approximately £120K a year. Therefore, the farming business would need to earn post tax profits of at least £120K a year to afford this. This clearly demonstrates a lack of understanding of the disparity between the capital value of land, where the policy behind the relief is to ensure property is not sold and so that capital value is never expected to be realised, vis-à-vis the earning capacity of land.
For those businesses who could afford this cost over 10 years it is likely to impact on their ability to invest in the business over that period and therefore is damaging to growth in the economy. Further, it will be interesting to understand the banks’ view on debt already in place on farms and how these measures will impact their appetite to lend in view of a potential future IHT liability.
The measures will impact trusts which will also be subject to the £1M allowance (shared between related trusts set up from yesterday), so careful thought will need to be given to the use of trusts and funding 10-year anniversary charges and exit charges from April 2026. The effective charge will be 3% if APR and BPR is only available at 50%, for value over £1M.
Looking at the longer-term positive impact of the proposed legislation, business and landowners should be encouraged to plan early, to create a retirement plan for income outside the business to fund retirement, allowing assets to be passed on earlier. Where assets are passed on more than seven years before death these IHT charges could be escaped. However, death after April 2026 and within seven years of the gift made on or after today will be caught by these measures.
This change feels particularly unjust where a family is hit by a tragic, sudden death of the business and landowner prior to the future planning of the estate taking place. In addition to the grief and loss which would be felt by any family, the measures announced in the Budget now add worry and stress over potential tax liabilities to the heir who inherits the business many years before they were expecting to do so. As a minimum, we recommend wills are in place, regularly reviewed and kept up to date. In light of this Budget announcement, it would be prudent to review those wills which are already in place.
In the meantime, for those who can afford to, consider gifting agricultural and business assets before the measures are introduced in April 2026. That will not be an option for everyone, where the current business owners are reliant on the income or where the succession plan is not ready to be implemented. For the gift to be effective for IHT purposes the donor must not reserve a benefit in the assets given away. If planning cannot be implemented before death, particularly where there is a financial dependency on the business, these measures will be damaging and likely lead to a breakup of the family farm or business which will be damaging to the economy.
We will play our part in lobbying government to ensure they are aware of the negative impact these measures would have on the economy - reduced growth in the economy, investment in businesses and a reduction in UK food production alongside the likely negative impact on the environment.
We strongly believe there are better ways to ensure the existing IHT reliefs are only available to genuine farming and commercial businesses intended to remain in viable and entrepreneurial family ownership and contributing to the economy. Measures such as removing the capital gains tax uplift on death where IHT reliefs have been claimed would ensure tax is paid where property is sold after death.
Additionally, the current qualifying period for APR and BPR could be extended from the current 2-year ownership period to, say, 10 years so that only genuine long-term entrepreneurial farms and businesses qualify. These measures would still provide the positive impacts mentioned above whilst enabling business owners to better plan with more security and knowledge of the impacts of earlier gifting, whilst also enabling banks to lend without the worry of a possible IHT bill.
Some good news - we were promised an extension to APR for land used for environmental schemes in the Spring Budget. We have now received confirmation Labour will support those measures announced by the previous government, but clearly the reliefs are reduced by the measures mentioned above. The announcement confirmed that the environmental value of land managed under an environmental land management agreement will be eligible for APR for deaths and other transfers of value from 6 April 2025.
Relief will be available for land managed under an environmental agreement with, or on behalf of, the UK government, devolved administrations, public bodies, local authorities, or approved responsible bodies.
If you wish to discuss your position please get in touch with a member of our team.