Much has already been written about the October 2024 Budget and its impact on farmers and other business owners. The changes being introduced to the inheritance tax rules on Agricultural Property Relief (APR) and Business Property Relief (BPR) are as impactful as they were surprising.

It is now more important than ever that farming businesses look at their succession plans and ensure that up to date and appropriate wills are in place. With many rural businesses trading as a family partnership, it is also crucial that partnership agreements are properly framed to ensure maximum ability to claim the reliefs as they now stand.

It is likely that HMRC will be paying closer attention to claims for APR and BPR going forward, and they will likely scrutinise the paperwork and valuation evidence more closely than before.

So, a joined-up approach between the family’s solicitors, accountants and surveyors is going to be at the heart of developing a succession plan that will maximise the remaining reliefs and survive Revenue scrutiny.

What are the new rules for APR and BPR?

At this stage, the draft legislation setting out the new rules for APR and BPR hasn’t been published and we await more detail of exactly how the amended reliefs will work. HMRC are planning a technical consultation early this year, but it will likely be some time before we see the fine print.

What we do know is that, for deaths on or after 6 April 2026, APR and BPR will be available but only on qualifying assets up to a value of £1 million per person. That £1 million limit will apply to all property in your estate qualifying for BPR and APR combined. The excess value over £1 million can still qualify for relief, but only at 50%. Therefore, the value of agricultural or business assets over and above £1 million will be taxed at an “effective rate” of 20%.

This £1 million limit can be reached very easily, when you total up the value of your land, livestock, equipment and vehicles.

What can farming businesses do to mitigate these changes?

Each farming business is different so there will be no “one size fits all” approach. Consulting with your lawyer, accountant and surveyor about your own specific circumstances will be necessary to make sure that the plan that you put in place is the right one for you, your family and your business. That said, it is likely that some of the following strategies will be useful tools for planning under the new regime:

Balancing assets between spouses

Each individual person will have £1 million of combined APR and BPR reliefs available to them at the 100% rate, so arranging ownership so that both spouses in a marriage have land or business assets in their own names will be useful to ensure both personal allowances are available. Unlike the standard inheritance tax (IHT) nil rate band, it appears that the APR and BPR reliefs will not be transferable between spouses, so you will either “use it or lose it”.

Lifetime gifting

Transferring assets down a generation during your lifetime is the most obvious method to reduce the value of the assets held on death. If a gift like this is made, then after seven years the value of that gift will not be counted as part of your estate on death (and if you die between three and seven years after the gift, then taper rules apply to reduce the value of the gift for IHT purposes).

Some people may be comfortable with transferring assets down a generation and hoping to live seven years. The gift could be coupled with a life insurance policy to protect the beneficiary of the gift from the tax charge that might arise if the donor doesn’t survive for the full seven year period.

There are legal and practical risks to consider, as with any lifetime gift. There may also be capital gains tax liabilities that need to be assessed. Further, the gifts with reservation of benefit rules mean that this is not a straightforward exercise if the person doing the gifting still needs to take an income or otherwise benefit from the farm assets (for example by continuing to live in a farmhouse or cottage that has been gifted away).

Life Insurance

If you are uncomfortable with making gifts, or there are practical reasons not to do so, then getting a handle on your exposure to IHT and buying life insurance to cover the tax when you die might be another option.

You should look at having any insurance policies written in trust to ensure the proceeds pass straight to the intended beneficiaries. (Remember also that if the person whose life is covered continues to pay the premiums, this will be treated as a gift for IHT purposes, subject to the annual £3,000 exemption.)

However, cover might not be readily available, or the premiums might be prohibitively expensive, particularly for older farmers.

Use a Trust to Hold the Farm

Using trusts as a vehicle to hold the land might be an option for those who are not comfortable with the legal risks of gifting assets outright to the younger generation. The capital gains tax reliefs on transferring assets into trust appear to be untouched.

However, transferring assets to a trust creates a range of other tax consequences which would need to be carefully thought through before this route is adopted.

HMRC are doing a technical consultation at the moment to decide exactly how the new rules will affect trusts. We will need to wait to see what unfolds there.

Transfer the Farm to a Limited company

Transferring the land into a company with the creative use of different classes of shares might be an appropriate route for some people to consider.

However, putting the land into a company creates a potential legal rights problem. Legal rights are a particular feature of Scots law that allow a person’s spouse, civil partner and children to claim a portion of the deceased person’s estate, even if the deceased did not leave anything to them in their will. Legal rights can only be claimed over ‘moveable’ property, which broadly speaking means anything other than land and buildings. However, when you put the land into a company, the asset that the individual farmer owns is a shareholding in the company, not the land itself directly. Shares are moveable property for legal rights purposes and could therefore swell the value of the pot available for legal rights, making claims more likely.

There may also be a liability to pay Land and Buildings Transaction Tax on a transfer of any land into a company.

Other options – and a note of caution

As the detailed rules are revealed, no doubt other strategies and ideas will develop. However, it is worth bearing in mind the old adage, don’t let the tax tail wag the whole dog. You could go to significant time, effort and expense using a complicated set up to minimise your exposure to inheritance tax, only to find that the rules change again in a few years’ time and you have to unpick everything. Take time to understand both the pros and cons of any strategy that you are considering.

What Should You Do Now?

We recommend focusing on the basics first and (unless there is a particular need for you to take action now) waiting to explore more detailed planning options when the detail of the new rules is clear.

Step one should be to conduct a thorough audit of your property and business assets to determine exactly what you own now, what it is worth and which elements will qualify for APR and BPR under the updated rules. Consider professional advice to identify areas of risk. Your lawyers, accountants and land agents can help you to carry out this exercise.

Get clarity on who the current legal owner or owners of the farm are and get an idea of what your potential liability might be. Check that things are set up to take full advantage of the reliefs that still are available. Make sure, for example, that you have a written partnership agreement in place and up to date wills.

More complex planning options can be explored later once the detailed rules are clear.

Remember that FAS grants are currently available to help towards the costs of getting professional farm succession planning advice. More information on that is available here.

If you have concerns about how the Budget might impact your IHT exposure, our specialist team is here to help. Please get in touch to discuss your options.