The restrictions to Inheritance Tax (IHT) Agricultural Property Relief (APR) and Business Property Relief (BPR) announced in the Chancellor Rachel Reeves’ Autumn Budget in October 2024 have already received widespread coverage. At this stage it appears unlikely that the UK government will materially alter these proposals which will see APR/BPR, where they apply at 100%, capped at a maximum of £1 million of agricultural and business assets from 6 April 2026. Any balance of value above this will be taxed to IHT at an effective rate of 20%. Whilst this might be more favourable than the 40% which typically applies to the rest of an individual’s estate, it will be of little consolation to land and business owners who will see their IHT liabilities increase significantly and essentially overnight, potentially impacting the ongoing viability of their business after death.
Draft legislation setting out precisely how these changes will operate has not yet been published. However, with 6 April 2026 now less than one year away, it makes sense to start a review of your tax and succession plans sooner rather than later: The review may cover:
- An assessment of the current business structure and anticipated IHT exposure on APR/BPR assets from 6 April 2026. The £1 million cap will encompass not only land and buildings but all assets of the business, including plant and machinery, supply contracts, growing crops marking a significant shift from previous practice. This is likely to result in additional costs and delays in the administration of estates, both in terms of instructing as well as paying for valuations and ultimately with HMRC who will require to agree valuations at death on which IHT is payable. This initial analysis will allow a broad quantification of the scale of the IHT liability, from which planning and IHT-funding options can then be considered.
- Maximisation of the £1 million allowance between spouses and civil partners. This is on the basis that one party’s £1 million allowance cannot be “transferred” to the survivor and instead will operate on a “use it or lose it” basis. For example, if a couple together hold APR/BPR assets in excess of £2m, but these are not allocated equally such that one party holds less than £1m, some degree of lifetime transfer may be appropriate. A lifetime transfer to a spouse or civil partner is exempt for IHT purposes and will also not result in an immediate capital gains tax liability but there will be other non-tax factors, such as the impact of matrimonial law on gifts, to take into account when determining whether this type of transfer is appropriate.
- Making use of the £1 million allowance between multiple members of the wider family unit. The new rules may essentially bring forward an individual’s ultimate succession plan for their farming or business interests. Provided the individual making the gift survives for 7 years, these gifts will generally fall out of account for IHT purposes, although the capital gains tax position will also need to be considered. In many cases the inherent capital gain can be “held over”, so that the recipient acquires the asset at its original cost (essentially deferring the capital gains tax).
- The Gift with Reservation of Benefit anti-avoidance rules – a gift is only effective for IHT purposes if the person making the gift does not derive a benefit from the asset gifted (such as continuing to receive rental income from land) at any point from the gift until death, as the normal 7 year rule does not apply to gifts where there is a reservation of benefit. Does the person making the gift, once it has been made, have sufficient other resources? In some cases, where the individual retains an active role in the business, they may take a reasonable salary but that should cease when they are no longer able to carry out those services.
- Business structures – if additional individuals are brought into the business, the impact on the day to day running and overall management of the business should be considered. How will decision-making be impacted and should any controls or rights of veto be considered, all of which have valuation implications? This could be documented in a Partnership Agreement or appropriate company Articles, for example. Asset protection considerations will also be relevant – is there exposure in the event of a divorce or bankruptcy? Pre and postnuptial agreements may be relevant.
- Life insurance / funding of IHT – this will play a significant role in planning in potentially funding IHT liabilities relating to assets retained until death which do not qualify for 100% APR/BPR. It may also be used to cover the potential IHT exposure if a gift is made now but death occurs within 7 years but after the 6 April 2026 rules take force. In many cases it will be possible to pay the IHT liability relating to the APR/BPR assets following a death in annual instalments over 10 years (with the balance falling due on an earlier sale or disposal within this period). However, even then this may cause significant financial hardship and, in some cases, impact the fundamental viability of the business, as Executors will want to retain these assets to make sure that the IHT will be paid. If they do not, then potentially they become personally liable for the IHT that should have been paid. This may impact on a business’s ability to borrow against assets which are being retained by Executors pending payment of any IHT.
Reviewing tax and succession plans will now allow land and business owners to plan accordingly and protect their rural business for years to come.
