Changes to Agricultural and Business Property Relief: A detailed legal view, by Sophie Burgoyne of Lanyon Bowdler Solicitors

We at Lanyon Bowdler feel it is important to take a more in-depth look on behalf of all British farmers at what the Government is saying here, and to qualify these talking points with data from our experts. 

Budget 2024 Changes to Inheritance Tax (IHT), Agricultural Property Relief (APR) and Business Property Relief (BPR)

 Firstly, let’s recap what changes to APR were introduced by the October 2024 Budget. The present rules (that apply until 5 April 2026) are that 100% relief from IHT applies to all qualifying agricultural and business assets (covered by BPR) in your estate. The changes introduced in the October Budget will confine what is presently a 100% relief unrestricted by reference to the value of the assets concerned to a combined BPR and APR band of £1 million, and thereafter give only 50% relief. This will likely have a more considerable impact on farming businesses than government figures suggest (reasons for which we outline below). 

 The Government talks in very general terms about existing allowances and the combination of those allowances with the new combined APR/BPR £1 million band. But these allowances should be examined and broken down carefully. We consider, for example, that when the Government talks about an IHT allowance of £2 million (or £3 million combined for a married farming couple), they are oversimplifying the position.  

Thresholds

 The standard IHT threshold or Nil Rate Band (NRB) for all taxpayers is £325,000. It is transferable between spouses (any such reference here includes registered civil partnerships) – in other words, the standard NRB combined between spouses is £650,000. It is also possible to add an additional £175,000 to that NRB – this is the Residence Nil Rate Band (RNRB). So, as with the NRB, if certain conditions are met, a married couple may have between them a combined RNRB of £350,000 to add to their combined standard NRBs of £650,000. Unsurprisingly, there are numerous hoops that must be jumped through in order to qualify for the RNRB to any extent:  

 You must own (or have previously owned) equity in a residence that you have occupied to the value of £175,000 (the RNRB) or up to £350,000 for a married couple. So, what if you have borrowed against your residence in order to provide working capital for your farm? You may not have £175,000 worth of equity in your property, let alone £350,000.

Next, to qualify for RNRB, you must leave your residence (or its net proceeds of sale) to lineal descendants: children, stepchildren, grandchildren or step-grandchildren. So, if you have no lineal descendants (remember, children of your unmarried partner who you have not formally adopted do not fall within this definition), you will not qualify at all for any element of the RNRB.  

If your estate is worth more than £2 million gross (and that includes the value of your agricultural and business assets), the RNRB starts to be tapered away. Once the value of your gross estate reaches £2.7 million, your estate will not qualify for any element of RNRB at all. 

 So, it seems the £3 million IHT allowance being referred to by the Government is largely theoretical. It will only apply to the limited number of married couples with lineal descendants who have a gross combined estate of less than £2 million and/or (if possible) make full use of the RNRB of the first spouse to die and all other available allowances at the time of that first death – not necessarily the easiest of things to do. 

 Married farming couples with a combined gross estate of more than £2 million in total also cannot rely on being able to claim a full combined RNRB, and transferable RNRB, on the second of their deaths. Not to labour the point, but the Government has not indicated that this new £1 million APR/BPR band is transferrable between spouses.

 Moreover, if you were a divorced farmer with children, the maximum amount of combined NRB and the new APR/BPR £1 million band you could apply against your estate would be £1.5 million. The same unmarried farmer without children would be limited to £1.35 million. 

“New rules are not in force until April 2026”

 The Government claims that enforcing the new rules from 5 April 2026 will give farmers time to make adequate plans for their estates. But unless you have already given your agricultural or business assets away, and then survived a full seven years from that lifetime transfer before the rules are implemented, any plans you put in place now will not beat the changes brought in by the October budget. The only thing that will allow assets in your death estate (or – in certain circumstances – those you have gifted in your lifetime) to qualify for APR or BPR at 100% under the present IHT regime is if you die on or before that date. 

The most effective estate planning has always relied on a strategy that includes lifetime gifting. However, the October budget has radically altered the landscape around lifetime gifting for farmers. If you have made a lifetime gift of agricultural or business assets on or before 5 April 2019, provided the assets are still used for their original business/agricultural purpose by the recipient, they should qualify for IHT BPR or APR at 100%, regardless of their value. This applies even if you do not survive a full seven years from the gifting of those assets. In contrast, if you die on or after 6 April 2026, you will need to have survived a full seven years in order for the assets that you have gifted to pass completely free of any IHT implications. 

Estate planning strategies that involve lifetime gifting have always needed to be a long-term plan. But, in any event, the Government is overgeneralising when they suggest farmers will be able to manage the changed APR and BPR landscape by making plans within the next 18 months. That is unless those plans include an acceptance of a burden of IHT that would be considerably more than it would have been prior to the changes imposed in the October budget. 

“Generations work in partnership on most family farms”

Government officials have cited a new total threshold of £5 - £6 million for most family farms. Frankly, this appears to us to be a generalised figure that makes a number of assumptions. Again, they are oversimplifying the often finely balanced business structures of family farms. We would suggest that, in order to illustrate how difficult in practice it might be for a family farming partnership to qualify for a £6 million combined allowance, the best analogy to use would be a scenario where the holes in many separate layers of thinly sliced Swiss cheese all have to line up. 

Our experts believe the cited family farm threshold of £6 million assumes a farming business that involves two married parents in partnership with their son or daughter and a spouse of that child (who also has a child / children of their own). One would have to assume that each of these four business partners would own just the right “Goldilocks” amount of equity in the family business and farm house/s fully to exploit their allowances as broken down above. Indeed, one would seemingly also have to assume that these four business partners either all own and occupy the same farmhouse or two separate farmhouses – quite a specific scenario.

While such scenarios do undoubtedly occur, it would take many years for a farming partnership structured along these lines to properly manoeuvre itself to such a position. A process like this would involve lifetime transfers of capital (possibly complex and numerous) requiring partners to confront and navigate other capital taxes. Risk of divorce could also generate complex capital protection issues and potentially endanger the family business. All these issues would need to be carefully considered and are complex to overcome. Advice would be required from professional advisers – valuers, accountants and solicitors – in turn generating significant additional expense for the partnership. 

“The intention of these proposals is to protect smaller farms”

The government claims one objective of the October budget changes is to protect smaller farms and to collect tax from what they describe as larger commercial interests that have invested in agricultural land but have chosen to not farm all of the land. If that was a serious concern, we believe they could have left the rules as they currently apply to owner-occupier farmers unchanged. What would be more in line with this professed objective would be to change the rules only for farm owners who have never occupied and farmed themselves, then perhaps the qualifying ownership period for APR in such cases could have been increased from the present seven to (say) 10 years. Alternatively, if the Government is intent on enacting these changes, it would have been a more consistent policy for the changes now to be imposed on all farmers owning agricultural assets from 6 April 2026 to be applied only to non-occupying farm owners. 

Treasury assurances as to the proposed thresholds protecting smaller farms and the reference to data from 2021/2022

Much has been made of the Government’s reference to only 27% of farms being affected by these changes. But, as this data is drawn from one year only, we are not sure that it can provide a basis for an accurate projection of how many farms will actually fall within the new £1 million combined APR/BPR band. We do not doubt the HMRC data relating to the number of claims made for APR in 2021/2022. However, the point is that these figures are not likely to accurately represent the number of IHT Accounts submitted for deceased farmers in 2021/22, the number of farming deaths there would have been in that period or the value of their estates. 

Traditionally, a claim for APR/BPR may only have been made on the second death of a married farming couple. In such scenarios, there would have been no claim for APR made by the estates of many farmers who died in 2021/22. In reliance on existing thresholds, the IHT spouse exemption, the transferable NRB and the pre-October budget rules relating to APR and BPR, many such estates would have passed outright to the surviving spouse on the first death of a married couple. 

For many years, we have advised (and will continue to advise) farming and business married couples to include strategies within their Wills to allow for the bequest of qualifying agricultural or business assets to non-spouse exempt beneficiaries on the first death. They therefore test and, if successful, are able to bank reliefs at that stage rather than relying on the IHT spouse exemption and the hope of a successful claim for APR or BPR on the second death. Nonetheless, there will be a significant number of our clients and farming families across the land who will have not adopted such strategies. 

The APR/BPR £1 million band is not transferable between spouses. After the October budget, if both spouses in a farming married couple are able to each utilise their APR/BPR £1 million band in full, they will need to do this not just on the second of their deaths but on each death. This, we would suggest, is likely to result in a significant increase in the number of claims being made for APR in years to come, and therefore on the number of farms affected by these changes. We would be very interested to review the same data set from years 2026/27 onwards. 

Many experts are also saying that the 73% of farmers the Government is claiming will be unaffected by the changes is skewed by the number of landholdings (not necessarily viable farming business concerns) who will have made claims for APR. If you examine the HMRC data for 2021/22, 50% of claims for APR in that period were for agricultural assets of up to only £500,000 in value. If it was possible to remove the claims made by smaller landholdings that are not probably in themselves actually viable farming businesses from this data, it would seem that the number of farming businesses that are likely to be affected by these changes would have to be greater than 27%. 

Gifting and taper relief on failed Potentially Exempt Transfers (PETs) 

It is being suggested that, if you have gifted and then fail to survive seven years from the gift, the position is not irretrievable. This is because IHT gifting taper relief may apply in relation to gifts where the donor survived at least three years. It is important to remember that taper relief will, in such failed PET situations, only taper IHT that actually falls due. So, for example, if a farmer gifted less than £900,000 worth of agricultural land to their children, failed to live seven years from the gift but did make 6, the IHT actually due on the failed PET would be zero. Therefore, the taper would also be zero. However, the deceased farmer’s combined allowances to apply against their death estate would have been exhausted to the tune of £900,000 by the failed PET. 

There is some suggestion that there is the possibility of some new form of taper relief that will apply just to the gifting of agricultural assets where donors have not survived a full seven years. However, we are sceptical about whether this will turn out to be anything more than a speculative misunderstanding of the present rules. So far, we have seen nothing in any HMRC release that evidences the introduction of any such potential new taper relief. 

Payment of IHT in instalments

A final point relates to the ability of farmers to pay their IHT relating to agricultural assets over a 10 year period. This is not a new thing. Moreover, where taxpayers have the option to pay IHT in instalments over 10 years, they have to pay interest to HMRC on the unpaid balance of IHT. We have now heard two suggestions from the Government (one of them in a recent Prime Minister’s Question Time) that the IHT farmers will have to pay on presently fully relieved agricultural assets from 6 April 2026 may be paid in instalments over 10 years without being subject to any interest. We will watch carefully for any developments in this area. However, so far we have seen nothing in any HMRC release that supports this as a formal proposal. In fact, the HMRC rate of interest on unpaid tax actually increased in the October Budget. 

Consultation

 In early 2025, there will be a formal Government consultation on the changes to APR and BPR. We will keep a close eye on that process and expect to report back on developments in a future blog. However, even with the level of interest, activity and lobbying these changes have generated, we counsel caution to any farmers who are holding out for a major government U-turn. This, it seems to us, is a significant policy from a new Government with a large majority who may not be too concerned about losing rural votes. We expect the consultation to be more of a technical exercise that deals with issues such as how HMRC forms for dealing with claims for APR, and how they will be comprised and completed. 

Sophie Burgoyne is a solicitor in the agriculture team at Lanyon Bowdler Solicitors, which works with clients across Shropshire, Herefordshire and North Wales. For more information, visit www.lblaw.co.uk