Farmers are being urged to “act now” to protect their legacy before inheritance tax changes come into effect.
Chancellor Rachel Reeves announced a raft of new tax policy proposals during the Autumn Budget to fill an alleged £40billion hole in the nations finances.
Despite the significant funds inheritance tax already raises, Ms Reeves targeted this levy to “close loopholes” and drag more estates into the tax threshold.
One included a reform to Agricultural Property Relief and Business Property Relief. Under rules which could become effective from April 2026, the first £1million of combined agricultural and business assets will remain fully exempt from inheritance tax (IHT).
For any assets above this threshold, IHT will apply at an effective rate of 20% due to a 50% relief on the standard tax 40% rate.
Ms Reeves claimed the move would “ensure continued protection of small family farms” as “three-quarters of claims will be unaffected” by the changes.
The controverisal proposal has gained widespread criticism, with many farmers arguing they’re “asset rich but cash poor” and won’t be able to afford the levy if it comes into effect, which could spur a mass sell-off of land.
However, there are some ways to mitigate impact, Rob Goodley, a partner at audit, tax and business advisory firm, Blick Rothenberg, has said.
Mr Goodley suggested farmers should first review their wills considering the proposed changes.
He clarified that assets passed between spouses are exempt from inheritance tax (IHT). Additionally, when one spouse dies and leaves assets to the surviving spouse, the value of those assets is adjusted for Capital Gains Tax (CGT) purposes, even though no IHT is due.
This adjustment can make it more tax-efficient for the surviving spouse to later gift those assets to their children.
He added: “If an individual inherits a farm that is worth £11million on the death of their parent, then that could give rise to a £2million IHT liability. This is a significant liability to meet, and if there are minimal other assets passing on death, then paying the IHT liability will be difficult.”
While liabilities can be paid over a ten-year period, but this will incur late payment interest costs.
Mr Goodley said: “If dividends are taken from the business to fund this liability, those dividends themselves will be subject to Income Tax, meaning that the cash burden to the business will be around 50% higher than the headline IHT liability. Those inheriting a farm may be forced to sell some land, if not the whole farm, to pay the IHT.”
However, he noted: “This tax funding issue could be resolved with appropriate life insurance policies to ensure there is money available to cover IHT costs, and farmers should evaluate their current policies in light of the Government’s proposals.”
The tax expert also pointed out the benefits to making lifetime gifts to the next generation, rather than waiting until death to transfer assets.
He explained: “If the transferor survives for at least seven years after making a gift to an individual, then the gifted assets will not be subject to IHT. Where business assets are gifted, there is often no CGT to pay, meaning gifts can be made without a tax charge if done properly.”
Mr Goodley noted that the Government plans to introduce “anti-forestalling” rules for lifetime gifts made between October 30, 2024, and April 5, 2026, to ensure that if the transferor dies on or after April 6, 2026, but within seven years of the gift, then the gift will be subject to this £1million APR cap.
This means farmers should get expert advice before making gifts, including from insurers, so they don’t risk the next generation being caught out by the tax.
However, Mr Goodley pointed out the important not to make any hasty decisions on the back of this announcement.
He explained: “The significant change to this relief is not due to become law until April 6, 2026, giving farmers time to consult tax experts on what to do next. We have not yet seen any draft legislation from the Government – so the final proposals could yet differ from what was announced in the Budget.”
He added: “Finally, we have already seen a significant backlash against the Government in relation to these changes, and the backlash will likely grow in strength in the coming weeks. That backlash could result in a change or withdrawal of the proposed changes.”
