The recent changes to Inheritance Tax (IHT) announced in the Autumn Budget 2024 have significant implications for farmers and landowners. These reforms aim to balance public finances according to the government, while ensuring that small family farms are not unfairly burdened. However, understanding and preparing for these changes is crucial for farmers to effectively manage their estates and secure their legacy for future generations.
We at McClarrons, asked Independent Financial Advice firm, Moneyweb Limited, to explain this further.
Read our previous blog with Moneyweb to learn how IHT impacts high-net-worth clients, here.
Overview of the Inheritance Tax Changes
The key changes to IHT affecting farmers include reforms to Agricultural Property Relief (APR) and Business Property Relief (BPR). Here’s a breakdown of the main points:
- Cap on 100% Relief: Starting from April 2026, the full 100% relief from IHT will be limited to the first £1 million of combined agricultural and business property. Any value above this threshold will receive 50% relief, with the remaining 50% subject to IHT at a reduced rate of up to 20%, rather than the standard 40%.
- Extended Relief for Environmental Land: From April 2025, land used in government-backed environmental schemes, such as conservation and regenerative agriculture, will qualify for APR. This encourages eco-friendly practices and aligns with the UK’s broader environmental goals.
- Reduced Relief on Unlisted Shares: From April 2026, the relief on investments in company shares not listed on recognised stock exchanges will be reduced to 50% BPR, down from the current 100%.
- Inheritance Tax on Pension Funds: From April 2027, unused pension funds and death benefits will be treated as part of the deceased’s estate and may be liable to IHT.
Impact on Farmers
These changes represent a significant shift in how farmers will approach estate planning and property ownership. Here are some of the potential impacts:
- Increased Tax Liability: The cap on 100% relief means that larger estates will face higher IHT liabilities. This could affect farmers with substantial land holdings, potentially leading to the sale of parts of the estate to cover tax bills.
- Encouragement of Sustainable Practices: The inclusion of environmental land in APR is a positive step for farmers engaged in sustainable agriculture. This change not only provides tax advantages but also supports the UK’s environmental objectives.
- Complex Estate Planning: With the reduction in relief for unlisted shares and the inclusion of pension funds in IHT calculations, farmers will need to adopt more complex estate planning strategies to minimise tax liabilities.
Preparing for the Changes
To navigate these changes effectively, farmers should consider the following steps:
- Review and Update Estate Plans: It’s essential to review current estate plans and make necessary adjustments to align with the new IHT rules. This may involve restructuring ownership of assets or exploring new investment opportunities that offer better tax efficiency.
- Engage with Professional Advisors: Consulting with tax advisors, estate planners, and legal professionals can provide valuable insights and strategies tailored to individual circumstances. Professional advice can help identify potential tax-saving opportunities and ensure compliance with the new regulations.
- Consider Environmental Schemes: Farmers should explore opportunities to participate in government-backed environmental schemes. These schemes not only offer tax relief but also contribute to sustainable land management practices.
- Plan for Pension Funds: With the inclusion of pension funds in IHT calculations, it’s crucial to plan how these funds will be managed and distributed. This may involve setting up trusts or other financial instruments to mitigate tax liabilities.
- Lobby for Fair Policies: Farmers and agricultural organisations should actively engage in consultations and lobby for fair policies that recognise the unique challenges faced by the farming community. Collective action can influence policy decisions and help ensure that the interests of farmers are adequately represented.
Case Studies
To illustrate the impact of these changes, let’s consider a few hypothetical scenarios:
Case Study 1: The Small Family Farm
John and Mary own a small family farm valued at £2 million. Under the new rules, they can pass on up to £3 million tax-free if they combine their standard tax-free allowances and APR. This means their farm can be passed to their children without incurring IHT, provided they meet the eligibility criteria for APR.
Case Study 2: The Large Estate
David owns a large estate valued at £5 million. In the last 7 years, he made some significant gifts which totalled £325,000. Under the new rules, the first £1 million of his estate will receive 100% relief, and the next £4 million will receive 50% relief. This means that £2 million of his estate will be subject to IHT at a reduced rate of up to 20%. David will need to plan carefully to manage this tax liability, potentially by selling part of the estate or restructuring his assets.
Case Study 3: The Sustainable Farmer
Emma runs a farm that participates in a government-backed environmental scheme. Her land qualifies for APR under the new rules, providing significant tax relief. Emma’s commitment to sustainable practices benefits the environment as well as offering financial advantages through reduced IHT.
In Summary, While the cap on 100% relief may increase tax liabilities for larger estates, the inclusion of environmental land in APR and the ability to pay tax in instalments offer some relief. By proactively reviewing estate plans, engaging with professional advisors, and considering sustainable practices, farmers can navigate these changes effectively and secure their legacy for future generations.
It’s crucial for farmers to stay informed about these changes and take action to mitigate their impact. With careful planning and strategic decision-making, the farming community can continue to thrive despite the evolving tax landscape.
About us
Moneyweb have been providing friendly and straight-talking independent financial advice to corporate, personal and trustee clients for three decades. Based in East Ayton, Scarborough, today we look after over £300m of client monies, but we haven’t forgotten our core principles. We pride ourselves in providing an excellent standard of service to all our clients, making sure we take the time to understand their needs, goals and preferences before we make any recommendations.
We specialise in high-net-worth tax planning and estate structuring. Contact us today for a bespoke consultation on your estate planning needs. You can contact us via email at enquiries@moneyweb-ifa.com or by phone on 01723 378234. Visit our website at www.moneyweb-ifa.com.
Disclaimer
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Blog updated: April 2025
