Agricultural landowners and business owners are being invited to have their say on the government’s proposals to cap property relief on Inheritance Tax (IHT). A public consultation on how the changes will affect qualifying property placed in trusts will run until the end of April.
Changes to Agricultural Property Relief (ARP) and Business Property Relief (BRP) were announced as part of the Autumn 2024 Budget. Under the proposals, 100% relief will be capped at £1 million, meaning that IHT will be paid on the value of any qualifying property over and above that amount. Relief will still be available at a 50% rate, meaning the effective rate of IHT payable on ARP and BRP will be 20%.
Despite this concession, and the fact that the nil-rate band and other allowances mean that property owned by couples could still be exempt for IHT up to a value of £3 million, the planned changes have drawn sharp criticism from farmers and agricultural business owners.
The government has suggested that the size of the cap means that only one in four farmers will be affected by the changes. But the National Farmer’s Union (NFU) has disputed that claim, arguing that it doesn’t reflect a realistic valuation of most working farms.
Critics of the plan to cap ARP and BRP point out that, as farm businesses largely constitute illiquid assets, beneficiaries and heirs will not have readily available funds to pay any IHT liability arising from inherited property, and will have no choice but to sell parts of the business off to cover the costs. This would lead to the break-up of family-owned farms, threatening the stability of the entire rural economy.
Others point out that the plans could adversely affect tenant farmers, should landowners decide that, without the IHT benefits, agricultural property no longer represents an attractive investment. Sell-offs could put tenancies in jeopardy.
Agricultural property in trust
The current consultation is seeking observations on how the proposed changes will impact on trusts. Under current rules, property placed into trust for inheritance purposes is subject to a 20% IHT ‘entry charge’ payable by the settlor. If they then survive 7 years or more, their benefactors pay no further IHT. However, the APR and BPR 100% reliefs mean that all qualifying property under those schemes is currently exempt from the entry charge.
That is set to change from April 6 2026 when the £1 million cap is introduced. Property valued at less than £1 million will continue to be exempt from both entry charges, ‘exit charges’ when taken out of trust and given to the benefactor, and 10-year anniversary charges. In all of these cases, the value of qualifying property over £1 million will incur a 20% IHT charge. The £1 million cap will function as a personal lifetime limit, regardless of how many trusts a settlor puts property into, or how many trusts a benefactor receives property from.
For qualifying property settled into trust before 30 October 2024, the 100% APR and BPR relief will apply irrespective of property value until the next 10-year anniversary calculation.
The consultation asks respondents to comment on the clarity of the new rules, the transitional arrangements, having a single personal allowance across multiple trusts, and proposals to standardise the calculation of exit charges.
Participation is open until 23rd April. You can take part by submitting responses via this online form. Alternatively, get in touch with our agricultural finance and personal tax planning specialists to discuss the impact of the IHT rule changes on your estate.
