Rural accountant Old Mill has released a series of practical tips to help mitigate the impact of changes announced in the budget.
“There’s no getting away from the fact that these are huge changes, which are going to cause a lot of heartache. The important thing is not to panic: Take stock, ensure your accountant has a thorough understanding of asset values and ownership, and make a plan,” says director Philip Kirkpatrick.
The headline change is the significant reductions in agricultural property relief and business property relief, meaning that businesses will be subject to a real-term inheritance tax rate of 20% on anything valued above the £1m cap.
For a farm valued at £3m, the first £325,000 would be tax free as per the nil-rate band (increasing to £500,000 where property is eligible for the residence nil-band rate as well). The next £1m would qualify for 100% relief under the new rules. The remaining £1.675m would incur a tax bill of £335,000.
“It’s important to remember that the £1m eligible for APR / BPR is not just land – it’s all the working assets, including livestock and machinery,” says Philip. “So that can very quickly be taken up.”
However, he adds, the cost of any loans or mortgages secured against the property could be deductible. These changes come into effect for deaths after the 5th of April 2026, meaning that inheritance claimed before this will be subject to the existing rules.
Large estates
Those will substantial assets will have to decide what to do sooner rather than later. Options include spreading the assets amongst family members to maximise the reliefs available; selling land to fund the tax bill; or borrowing to pay it.
“Borrowing money to service that debt will put a considerable strain on a farm business,” explains Philip. “I think there will be a lot more land coming to the market.”
He says that the most sensible thing to do is to spread assets around the family. The £1m allowance does not pass automatically to a spouse, so it’s vital to ensure that spouses are making the most of their allowances, as assets can be spread without tax being incurred.
Landowners can also pass on assets without incurring inheritance tax, providing that they survive seven years after the date of the gift. Gifts made before the budget were subject to no cap on the value, or the tax free element of the gift.
Following the budget, gifts made will count towards the £1m cap should the landowner die within seven years.
“These changes are going to encourage people to hand on assets much earlier in life, which probably isn’t a bad thing for the industry. However, how the Government has chosen to do this is going to hurt some families – particularly those suffering unexpected deaths,” says Mr Kirkpatrick.
Early inheritance also won’t suit everyone, so the implications must be considered for each individual business.
Philip predicts that many will take out life insurance policies to cover the potential inheritance tax bills.
“If you’re making gifts and are concerned you could die within the seven-year window, you might take out insurance to cover the potential tax, just for that period; it could be an affordable solution.”
Capital gains tax
During any restructuring, it is important to consider the implications on capital gains tax. While gifts to spouses are tax free, other gifts are liable at 18% for basic rate taxpayers and 24% for higher rate taxpayers.
Holdover relief is an option to defer the tax liability and if it is the donor’s main house, principal private residence relief can be available.
If a more comprehensive restructure, or sale, is considered then business asset disposal relief may apply on gains up to £1m per person. This is currently levied at 10%, increasing to 14% from April and 18% the following year.
Due to this, Philip believes that there will be considerable uncertainty for tenant farmers.
“Landlords letting land only qualify for the £1m APR / BPR allowance, so on death we could see parts of estates sold off to pay the tax. And the investment case for non-farmers to buy land has got worse. This may end up being a positive for the industry, however it will certainly cause some upheaval over the next few years.”
Pending a consultation, pension funds are also expected to fall within the estate from April 2027 and will be subject to tax following a death. Those passing assets on will also need to consider what to retain to secure their own financial security.
“Every business and situation is different. But what’s critical now is not to bury your head in the sand. Take stock. Work with your accountant and trusted professionals, and don’t rely on any tax planning or Wills that have been done in the past without checking it still stacks up. There is no substitute for careful planning for the future, now more than ever.”