The farming sector’s immediate response to the Chancellor’s decision to remove APR from farming assets over £1million was one of dismay, swiftly followed by condemnation. Furthermore, the Treasury’s assessment that fewer than 30% of farms would be affected, appeared wildly at odds with Defra’s own figure of 66%. Despite the obvious anxiety that Rachel Reeves’ announcement caused, it is essential to remember that these proposals, even if implemented in full, will not take effect until April 2026, giving farmers time to plan. However, some positive news did emerge from the budget: APR will extend to land managed under an environmental scheme.
Planned changes
Currently, all land (and ‘character-appropriate’ farmhouses) used for agricultural purposes can be passed on free of inheritance tax providing it is part of a working farm, either owner-occupied for a minimum of two years, or tenanted for seven years (on a tenancy that began on or after 1 September 1995).
From April 2026, the following changes apply:
- 100% combined APR and BPR will only be available on qualifying assets up to £1m. Assets exceeding this limit will be subject to an effective IHT rate of 20% IHT. CGT will continue to be rebased. Any IHT payable can be paid, interest-free, over a ten-year period.
- The nil rate band, residence nil-rate band, transfers between spouses and the seven-year rule around gifts will not change.
- Trusts have always been a valuable tool for succession planning but the rules around their eligibility for IHT are also changing. Each individual trust set up before the budget remains eligible for the £1m allowance if the donor dies after April 2026. However, for trusts created after 30 October 2024, the £1m allowance would be divided between them all. A technical consultation exploring options for implementing the changes ended on 23 April; the government response is expected towards the end of the year.
It is worth noting that gifts made into a lifetime trust created after 30 October 2024 will trigger a 10% IHT entry charge on assets over £1m. The seven-year rule will apply on exit charges i.e. no tax is payable if the donor survives their gift by seven years but if they die within seven years, another 10% will be due on the assets over £1m with the same result as if no trust had been made. It is also worth remembering that agricultural assets in a trust attract a 3% charge every 10 years.
How much can be passed on?
The government claims that, when all allowances are counted, the ‘average’ farm will be will able to pass on £3m before IHT kicks in is rather disingenuous. This figure only applies to couples with children who jointly own their farm. The £1m allowance applies to an individual, rather than a farm, so each spouse can pass on their £1m allowance plus their £325k nil rate band and £175k residence nil rate band (if they have direct descendants) making a total of £3m between them. However, note that the £1m allowance is not transferable between spouses. Without direct descendants, a couple could pass on £2.65m, and for someone who is not married, and with no direct descendants, the most they could pass on (say to a nephew or niece) is £1.325m.
Take time to plan
Despite the natural inclination to take immediate action, this is a time for calm reflection. It is more likely than not that most affected farms and estates will be able to mitigate some, if not all, their IHT liability, bearing in mind that there will not be a one-size fits all solution. Indeed, for some families, the new rules may galvanise them into implementing recommendations that have been gathering dust or, for others, encourage conversations about succession planning that should have been had many years ago. Regardless, this is definitely time to accept that planning for the future needs to be an essential agenda item for every business meeting.
What to do next
The first task should be to assess your likely exposure to IHT under the new regime and then consider how you might meet any IHT liability. There are options but it’s important to remember that not all will work in all situations.
One approach might be to gift land to the next generation. Again, we would urge caution as this will not be the right solution for every farm. In essence, gifts of land made during your lifetime will not be subject to IHT providing you survive for seven years (and the three-year tapering remains in place). However, you must not retain any interest in that gift otherwise you will fall foul of the ‘gift with reservation of benefit’ rules. An example would be gifting the farmhouse to the next generation but retaining sole occupation without payment of a market rent. Other solutions being widely mooted include equalisation of the farming assets between spouses, and another is insurance but, again, professional advice should be taken as it can be expensive and not universally applicable.
Given that intensive lobbying to persuade the Treasury to review the new APR rules have come to nought, our advice is to plan on the assumption that the government will not row back on its decision. Start with undertaking a thorough review of your current position, including reviewing your will(s), partnership agreement and the farm’s ownership structure, with all your professional advisers working together. This will give you an all-round view of your business and help to devise a tax-efficient approach that will underpin the long-term survival of your farm.
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The information published across our Knowledge Base is correct at the time of going to press.
