One of the most controversial measures announced in the Autumn Budget was the decision to remove the Inheritance Tax (IHT) exemption from agricultural property and businesses.
From April 2026, 100% IHT relief available on all farm-related business and property inheritance will be limited to the first £1 million in combined assets. After that, the value of an inheritance will be taxed at a reduced rate of 20%, a 50% reduction on the base IHT rate of 40%.
The measures have caused widespread consternation among farmers and wider rural communities. Family farms are routinely passed down from generation to generation. But as the property and businesses handed down are mostly illiquid assets, the worry is that beneficiaries will be landed with large tax bill they cannot pay without selling off some of those assets. This could harm the viability of smaller businesses and discourage the next generation from taking on the family business.
Because of these concerns, a lot of farmers and agricultural business owners are understandably keen to work out their options going forward. Here are some key things you need to know, and what you can do to mitigate any increased IHT liabilities arising from the changes.
Up to £3m in farm assets still exempt
The new measures are being enacted via reform of Agricultural Property Relief (APR) and Business Property Relief (BPR). These reliefs exist in addition to the standard nil-rate band of £325,000 before IHT kicks in, plus £175,000 if a home is left to a direct relative. That means, with APR and BPR, that the effective threshold before IHT will have to be paid on farm and agricultural assets left by an individual will be £1.5 million.
Moreover, under IHT rules, all assets left to a surviving spouse are exempt from tax, plus they ‘inherit’ their partner’s allowances and reliefs. So between them, a couple can pass on up to £3 million in assets tax-free when a farm business and associated property is involved.
Reducing liabilities
If you believe the total value of assets will exceed these thresholds and trigger IHT liabilities for your descendants, there are several options available to reduce them. One is to pass on assets during your lifetime as a gift. Any gift of any value can be given tax free, as long as you survive for seven years after it is given. However, if you still continue to benefit from the gift, such as taking income from a business or living in a property, this counts as a gift with reservation and could still count towards the taxable value of your estate when you die.
Another option is to take out a life insurance policy with a view to your intended beneficiaries using the payout to cover IHT. It is recommended to put a policy into trust for your beneficiaries so that the proceeds do not count towards the value of your estate.
To discuss your estate planning options further, please get in touch with our team of agriculture and farming finance specialists.
