At Buckles, we want to acknowledge the shock and anger over the Inheritance Tax (IHT) changes announced in the Autumn Budget. While the politicians debate the statistics to agree precisely how many farmers are going to affected by the changes, the reality is that they will loom heavy over the entire industry.
What are the changes?
To confirm, it was announced that from 6 April 2026 the availability of Agricultural Property Relief (APR) and Business Property Relief (BPR) combined will be limited to £1 million. Above this sum,50% relief can be claimed against qualifying assets and the remaining 50% would be taxed at IHT at 40%. The net effect being that 20% tax will be paid on qualifying assets over £1 million where other allowances are not available. At present there is no threshold for claims of APR and BPR; they can be used separately or together.
These changes come alongside confirmation that the Nil Rate Band will remain at £325,000 with the Residence Nil Rate Band at £175,000 until April 2030. Given that both the Nil Rate Band and Residence Nil Rate Band can be carried forward to the surviving spouse, this means that a married couple will typically benefit from a total IHT allowance of £1,000,000. But due to the tapering rules of the Residence Nil Rate Band for estates over £2 million often the allowance is limited or not available at all for farming couples. This is because when you add up the market value of the farm house, building and machinery, it’s common to reach and exceed £2 million. Despite this, most estates for working farmers are currently free of IHT given the unlimited availability of APR and BPR.
Worked example
To give an example of how the changes will have an impact, let’s say a farmer who is a widower died owning a farmhouse, buildings & 200 acres of land that was farmed by the family partnership and the total value of the farming assets worked out to be £2.75 million. In addition, there are non-farming assets of £50,000. Under the current rules, claims for APR and BPR ought to cover the farming assets except a portion of the farmhouse, let’s say £50,000 (HMRC maintain that a farmhouse has an “amenity value” above the agricultural value). The non-relievable portion of the farmhouse and non-farming assets totalling £100,000 would fall well within the Nil Rate Band, so no IHT would be payable.
But from April 2026, the cap on APR and BPR would mean that a significant amount of IHT would be payable. After the £1m relief was applied, we would then need to look to the regular allowances. Now the Nil Rate Band and Transferable Nil Rate Band ought to be available, but the Residence Nil Rate Band wouldn’t apply because where assets exceed £2.7 million, no Residence Nil Rate Band is available. The tapering of the Residence Nil Rate Band has a disproportionate effect on farmers due to high value of land, property and machinery. Until now, the effect of that probably hasn’t been felt by many farmers except those with significant non-farming assets.
The other point to note here is that there has been no suggestion from the Government to date that the reliefs are transferable between spouses. So, in this example, the deceased’s estate can only claim £1 million of APR and BPR in total and cannot make any claims for the late wife’s unused relief as they could do with her Nil Rate Band and Residence Nil Rate Band.
What this all means is that in this example, the estate will have an IHT bill of £250,000. Naturally the question remains of how this will be paid if there is only £50,000 of cash within the estate. Now you can pay IHT in 10 -year instalments for land and buildings and business interests but the current rate of interest that HMRC charge is 7.5% so the cost of the yearly repayments to the business would be huge. The beneficiaries of the estate would be left with the difficult decision of whether to bear that cost over 10 years or to sell land, both of which affect the viability of the business moving forward. For this reason, and given the impact of all the other market events and changes which the industry has borne in recent years, we understand why there is so much anguish in the farming community.
Cause for Hope?
There is hope that the changes announced will be altered in the coming months, as the industry comes together to challenge the Government’s figures. Perhaps the threshold will be raised so that only the largest farms are affected. If the Government won’t concede, then perhaps like with the VAT charges imposed on Private Schools, we will see legal challenges, but these could take years to be resolved.
Over the coming months, our Agricultural and Private Client team will be monitoring this matter closely both in terms of the details as they are announced and whether there are any concessions. In the meantime, we recommend that anyone worried about the changes contact us for advice. Working closely with your accountant, there are ways we can ensure that your affairs are arranged in the most tax efficient way to include reviewing Wills and considering lifetime gifting.
