How will the changes in Agricultural Property Relief impact farmers?

In the Autumn Budget, the Chancellor announced that the same £1,000,000 limit has been placed on business property relief (“BPR”), the relief from inheritance tax (“IHT”) payable on the value of shares in trading companies or of interests in businesses. To that extent, farmers are treated equally with business owners with the £1 million limit being cumulative between agricultural property relief (“APR”) and BPR. APR can also apply to farmhouses used in the farming business. In addition to the ability to transfer assets to descendants of up to £325,000 without incurring IHT charge, there is a further exemption of £175,000 from IHT where a home is transferred on death to direct descendants. That is subject to a taper which reduces the amount of the residence nil rate band by one pound for every £2 that the net value of the estate is more than £2,000,000. Qualifying estates can therefore transfer up to £1,500,000 free of IHT where BPR and/or APR apply.

As the availability of APR on death has attracted many non-farmers to invest in farmland and to organise their affairs so that they are treated as active farmers, even if they do not set foot on the land, the limitation on the availability of APR is likely to reduce the attractiveness of agricultural land as an investment, and, in all probability, that will see land values fall. With the possible exception of some good arable land, the income that can be generated from farmland currently does not justify the historically high values now placed on it. Accordingly, for active farmers, a reduction in the value of land may enable them to expand their farms. Of course, farmers who want to exit the business may see a reduction in the value of the land that they wish to sell, but, if they are selling the land, the cash that they receive from selling it, will be subject to IHT at 40% just like any other asset if they die holding that cash. Nonetheless, business asset disposal relief means that Capital Gains Tax (“CGT”)at a lower rate of 10% (rising to 14% from 6 April 2025 and 18% from 6 April 2026) will be payable on the first £1 million of gain on the disposal of an agricultural business, so long as the farmer has owned the business for at least two years. In that respect, a farmer selling his farm is in a rather better position than a taxpayer selling investments.

IHT and passing on the farm

Provided farmers do not “reserve a benefit” in any gifts they make and live for seven years after having passed on the farm to their children, there will be no IHT payable. If the farmer survives for at least three years after the gift, the IHT charge tapers down by 20% each year. Care needs to be taken, though, where a farmer passes on farm assets to the next generation. If the next generation sell those assets and the farmer dies within seven years of the gift, APR/BPR will be lost and IHT would apply at the normal rate of 40% (subject to any reductions under the tapering rules). The Government has also announced they will be introducing anti-forestalling rules to stop lifetime gifts from qualifying for full relief rather than being subject to the £1 million limit. Details of the anti-forestalling measures are scheduled to be announced in early 2025.

It is not possible for the donor (the farmer or his or her spouse) to retain an interest in the assets transferred, but very often farms have secondary accommodation in which an elderly farmer and their spouse may wish to live, and that accommodation could be excluded from the gift. If the farmer is giving away the family farm to the next generation, thought needs to be given to their financial position, especially if they have been living off the farm earnings prior to the gift.

It may be possible, if the farmer is in good health, to insure the potential IHT liability for a sum considerably less than the potential IHT charge. The insurance will pay the IHT should the farmer unfortunately die within the seven years. Policies will usually need to be “written into trust” to make sure they do not fall within the farmer’s estate and so become taxable to IHT at 40% on their death.

The allowances referred to above can be doubled up if the farmer is trading in partnership with his spouse and the land is jointly owned by them. However, any unused part of an allowance cannot be transferred to a surviving spouse. This can frequently happen where the first spouse to die leaves all their assets to the survivor. Because this transfer will be tax-free under the spouse exemption, the lifetime £1 million BPR/APR relief will be unused and therefore lost. This means married couples who own farms and businesses need to take care when preparing wills to maximise use of their BPR/APR allowances.

If an elderly farmer has a younger spouse, they could consider transferring the farm to their spouse, who, in turn, could give it to their children. That gift would start the seven-year period referred to above running but perhaps with less risk of death within the seven years. The cost of insuring the younger spouse’s life may also be less than the cost of insuring the elderly farmer. Alternatively, spouses could look into obtaining a joint life second death policy which pays out on the death of the second spouse.

Any gifts of farmland or business assets will be disposals for CGT purposes. Gifts made between connected persons are deemed to be at market value, so such gifts can lead to sizeable charges to CGT where the assets are sitting at a significant unrealised gain. Fortunately for farmers, transfers of assets qualifying for APR/BPR will usually qualify for holdover relief from CGT. This means that the gift recipients take the asset at the base cost of the person making the gift, meaning that no immediate CGT charge arises.

If the farm is operated by a company, consideration might be given to freezing the current value of the shares in the company and ensuring that any future growth in the value of the company is enjoyed only by the farmer’s children. It is usually possible to restructure the way in which the shares in a farm company are held to achieve that objective. Whilst IHT, subject to BPR relief, would be charged on the current value of the shares in the farming company, any future growth in the value of the company would belong to the next generation and would not be subject to IHT.

What is clear, as a result of the changes to APR and BPR made in the Budget, is that all farmers should now carefully look at their circumstances and take good advice to avoid the many pitfalls created by the latest Budget.

If you have questions or concerns about APR, please contact Geoffrey Davies and Alex Boothman.