Key changes to Agricultural Property Relief explained: Autumn Budget 2024

On 30 October, the new Labour Government announced reforms to Agricultural Property Relief (APR) and Business Property Relief (BPR) set to affect a number of farming businesses. Jack Deal, Business Advisory Partner discusses the changes and how it will affect businesses in this latest insight.

The good news is that, with careful planning, and financial advice, many families and businesses will be able to mitigate additional taxes under the new rules.

In short, APR and BPR are Inheritance Tax (IHT) reliefs which, prior to the Budget, enabled the transfer of qualifying agricultural property and businesses without an IHT liability arising.

The headline reform includes:

• A cap of £1 million per person on combined claims for APR/BPR
• An effective IHT rate of tax of 20% on the value of assets qualifying for APR/BPR in excess of £1 million

The measures will come into force from 6 April 2026.

The £1 million APR/BPR allowance is in addition to an individual’s Nil Rate Band (NRB) of £325,000 and (for estates below a certain level) Residence Nil Rate Band (RNRB) of £175,000.

Therefore with careful planning, a married couple could pass assets qualifying for APR and/or BPR worth up to £3 million without an IHT liability arising.

It must be stressed that this does require very careful planning. For example, if an individual makes a gift before 6 April 2026, and dies after 6 April 2026 but within seven years of the gift, the gift will be brought into the deceased’s death estate and taxed under the new rules rather than the old rules.

The Government has released guidance notes since the Budget, which are helping to form our thoughts on what this means for our clients. Draft legislation should arrive in early 2025, and this will be subject to Parliamentary scrutiny before making its way into a Finance Act.

In the meantime we’ve put together the case study below to explore our initial thoughts on actions that could be taken to manage your position.  It’s representative of many farmers who will be worried about these new rules.

While we await the detailed legislation to support these reforms. This article assumes that what we’ve been told makes it into legislation, and that the legislation remains in place (e.g. the new rules are not reversed by a subsequent Government).

Case study

Please note this is a fictional farming family, any resemblance to real people is entirely coincidental. 

Giles (aged 70) and Jackie (65) farm in partnership with their son Michael (45) and daughter Sarah (40). Michael and Sarah are both married and each have two minor children.

The partnership farms 750 acres. Giles and Jackie live in the farmhouse which is shown on the partnership’s balance sheet. The partnership also holds three cottages which are let to third party tenants.

Giles inherited the assets from his father in 1990 and they are now owned 50:50 with Jackie. The assets have been valued as follows:

Giles and Jackie each have their full £325,000 Nil Rate Bands available. We would expect them not to qualify for the £175,000 Residence Nil Rate Band given the value of their estate.

Assuming Giles and Jackie died on the same day, and that they own no assets outside of the partnership, their Executors are faced with an IHT liability of £1,370,000. Before the Budget changes announced in October 2024, there would have been no IHT liability at all.

This liability can be paid to HMRC over a period of ten years interest free. This equates to an annual repayment of £137,000.

Farming returns are volatile and farmers are faced with significant factors outside of their control, for example global grain prices and the weather. The partnership has beaten the UK average and has made an average profit for the last three years of £190,000, a 2% return on the value of its assets.

The four partners share profits equally and have a combined tax liability of £28,500 per annum.

Assuming the partnership converts that profit into cash, and before paying the IHT liability, the partnership has £161,500 of cash available annually.

The IHT repayment is £137,000 per annum, leaving £24,500 available to pay to the partners (£6,125 each).

This precarious cash position is the reality for many farmers like this, with high asset values but low returns on those values.

Careful planning is essential

This is worrying at first glance. The good news is that Giles and Jackie have options and, with careful planning, they may be able to avoid or reduce the IHT liability.

Giles and Jackie’s wills leave their estates to each other on first death, and then to Michael and Sarah in equal shares on second death.

Pre-Budget, they had been advised that these assets would qualify for APR and BPR and would pass without an IHT liability. In addition to this, Michael and Sarah’s Capital Gains Tax (CGT) base cost would be uplifted to market value.

The CGT base cost uplift, which was not changed in the Budget, would be valuable if Michael and Sarah were considering selling the assets in the future, given that the land’s current base cost is likely to be low.

Assuming the land’s current base cost is £1k per acre, and that the land is sold at a time when the CGT rate was 24%, Michael and Sarah’s CGT liability would be £1.62 million less with a base cost uplift to £10k per acre.

There are a number of potential routes to avoiding or reducing the IHT announced in the Budget and these are considered below:

Lifetime gift to Michael and Sarah

Giles and Jackie could transfer some/all of the assets to Michael and Sarah in their lifetime.

If they both lived seven years from the date of the gift, no IHT would be payable on it.

Careful advice would be required, but it may also be possible to avoid paying any CGT on the transfer.

If Giles or Jackie died within seven years of the gift, it would be included in their death estate and be subject to IHT. It may be that the IHT payable in this scenario is no more than the IHT payable on Giles and Jackie dying owning the assets.

The downside to this option is that Michael and Sarah would take on the land at Giles and Jackie’s CGT base cost (1990 values). If they were to sell any of the assets in the future, they’d be liable to CGT on the increase in value since 1990.

Lifetime transfers require careful planning and advice, particularly to ensure donors don’t fall foul of the Gift With Reservation of Benefit (GWROB) rules. The obvious issue here is the farmhouse, and typically one would expect Giles and Jackie to retain ownership of this.

Careful planning would also be required to ensure that Giles and Jackie, having given away the arable land and rental properties, aren’t seen to continue to benefit from those assets.

Transfer of assets into Trust

Giles and Jackie could transfer some/all of the assets (again, likely to exclude the farmhouse) to a Trust.

We won’t explore the different types of Trust here but will assume the Trust is established for the initial benefit of Michael and Sarah only.

Transfers into Trust are assessed for IHT at the point of transfer.

A transfer made before 6 April 2026 would attract APR/BPR under the old regime. Provided Giles and Jackie lived seven years from the date of transfer, no IHT would be payable.

A transfer made on or after 6 April 2026 would attract APR/BPR but under the new regime.

Trusts are then tested for IHT on the 10 year anniversary of their establishment, depending on how they are set up. After 5 April 2026 the new regime will apply, with the Trust having its own £1 million allowance.

Incorporation of the business

Giles and Jackie could consider transferring the business to a new company owned by them.

Subject to advice, this may be possible without giving rise to tax liabilities.

Shares in the company could then tax efficiently be passed to Michael and Sarah during Giles’ and Jackie’s lifetime. The gifting rules referred above would come into play, but it may be possible to agree a lower value for shares in a company, as compared to a share in land and property.

The company option may also assist with navigating the GWROB rules referred to above.

Steps to take if the IHT isn’t successfully avoided

Borrowing to fund IHT

Michael and Sarah could consider taking a bank loan to cover the IHT.

This could be secured against the assets inherited but they would need to be able to demonstrate affordability to the bank.

This is very similar to paying the tax over ten years (in effect borrowing from HMRC) albeit the bank may be willing to offer some or all of the debt on interest only terms. This would make the debt more expensive in the long run, but more affordable in terms of cash flow over the short term.

Selling assets

Michael and Sarah could consider selling assets to settle the IHT.

Depending on how they inherit the assets, they may receive a base cost uplift for CGT. This may enable them to sell the rental properties without paying any CGT.

This avoids the need to borrow from the bank or pay HMRC in ten instalments, preventing borrowing costs or challenges on monthly cash flows. The downside of course is that they will no longer benefit from the rental income obtained from the properties.

Insurance policies

Life insurance policies were popular before the introduction of APR and BPR and are expected to increase in popularity following these changes.

Essentially, a life insurance policy pays out on the death of the life insured and would be written to cover an estimate of that individual’s IHT liability on death.

The level of premium payable depends on a number of factors – most crucially the amount to be paid out under the policy and the age and health of the individual being insured.

Giles and Jackie could consider a policy either to cover the IHT payable on their deaths (assuming they leave their wills as they are) or to cover the potential IHT arising if their planning fails, e.g. if they make a lifetime gift and die within seven years of the gift.

Michael and Sarah are in their 40’s and life insurance may not seem an obvious solution for them. It would however be worth considering, particularly whilst their children are minors. Whilst they both have time to plan their own succession and tax position, if something were to happen to them unexpectedly their Executors may be faced with an unaffordable tax liability.

Summary

As I mentioned at the start of this article, each family and business’s circumstances are different and tailored advice is required to navigate the changes announced in the Autumn Budget, so please take time to speak to your advisers to ensure that the advice is thoroughly understood and adapted to your situation. If you would like to speak to myself, or another member of the Scrutton Bland team, please email hello@scruttonbland.co.uk or call 0330 058 6559.