Farmers Inheritance Tax and the Impact of the Autumn Budget 2024

The autumn budget came as a shock to many farmers, who may now face a significant Inheritance Tax bill if they pass away after the 6^th of April 2026.

From that date, the 100% Business Property Relief (BPR) and Agricultural Property Relief (APR) will vanish. That said, there's still time to plan, and you can take steps to lessen the financial burden on your family.

Understanding Your Tax-Free Allowances

Even with the removal of full APR and BPR, some allowances remain available:

• Nil Rate Band: £325,000 (which can be combined with a spouse’s allowance for a total of £650,000)
• Agricultural Property Relief Allowance: £1 million
• Effective Inheritance Tax Rate on Agricultural Property: 20% (40% tax reduced by a 50% relief)

Making the Most of Your Allowances as a Married Couple

As a married couple, you could increase the amount you leave without paying tax by a further £1 million, if you construct your Wills carefully and make sure that £1 million of agricultural property is passed to the next generation on the first of your deaths.

If you don’t use your Agricultural Property Relief before each of your deaths, one allowance will be forfeited.

Considering a Discretionary Trust

Not every couple will be able to afford to lose £1 million worth of their spouse’s assets. If that is the case, then you could think about leaving the property into a Discretionary Trust instead so both your spouse and the next generation can benefit. 

Although there are some cost and time commitments in running a Discretionary Trust, given that the Inheritance Tax you will expect to pay on £1 million worth of agricultural property is £200,000, that expense is likely to be well worthwhile.

You will need to seek individual legal advice to work out what the best option for you and your family is.

Strategic Gifting to Reduce IHT Liability

You may want to try and save more tax by strategically making gifts to the younger generation over the years.

Your priority is to provide for your own needs, but the reality is that at the age of 70, you probably need less by way of income than you did when you were 50. As such, you may find it easier to make gifts as life goes on.

Important Considerations When Gifting Property:

• If you continue to benefit from an asset after gifting it - such as earning rental income or profits from crops - it will not be considered a genuine gift for tax purposes.
• Once transferred, you lose control over the asset, and external factors (such as divorce or financial difficulties of your children) could put the farm at risk.
• There may also be Capital Gains Tax (CGT) implications, depending on the circumstances.

Using a Deed of Variation After Bereavement

If your spouse has passed away within the last two years, there may be an opportunity to restructure the estate using a Deed of Variation.

This legal tool allows you to redirect some farming assets to the next generation, potentially saving substantial amounts in tax. It’s worth discussing this option with a specialist solicitor to see if it’s a viable strategy for your situation.

Should You Sell Your Agricultural Assets?

For some farmers, selling up may seem like a natural response to the increased tax burden. However, this may not be the best option.

• Converting agricultural assets into cash or investments could expose them to a higher 40% IHT rate, without the benefit of Agricultural Property Relief.
• Additionally, you lose the option to pay IHT in ten yearly instalments, which can help ease the financial impact.
• Keeping your farm assets within the family remains an attractive investment strategy due to these tax benefits.

Planning for the Future

It is more important than ever for you to discuss your plans for the future with the next generation and then work with all your advisors – solicitors, accountants and land agents – to work out the best strategy for your family. 

Regular thought and action will be more valuable to you and your family than ever. We would be happy to meet up with you to listen to your personal circumstances and help find the option that suits you and your family the best.

Emma Morris, solicitor at our Malton office and Sharon Richardson, Head of Private Client team based at our York office, have both spoken to farmers about this in November 2024 at NFU/GSC Grays business resilience events about estate planning and the impact of the Autumn Budget 2024 decisions on farmers and farming businesses.

Please contact one of them for help and advice if you are involved in a family farming business.