The 2024 Autumn Budget raised employers’ national insurance, capital gains tax and stamp duty on second homes, but a key concern for farmers is the new cap on agricultural relief from inheritance tax (IHT).
In what is a major blow for the farming community, Chancellor Rachel Reeves announced that IHT business and agricultural 100% reliefs will be capped at a combined total of £1m from April 2026. Above that, the rate of tax relief will be 50%.
In addition, unused pension funds and death benefits will form part of a person’s estate for IHT purposes from 6 April 2027. The existing freeze on the IHT nil rate band (£325,000), the residence nil rate band (£175,000) and its associated taper threshold (£2m) will also be extended by two years to 5 April 2030.
IHT business and agricultural reliefs
From 6 April 2026, the current 100% rate of relief will continue for the first £1m of combined agricultural and business property for individuals and trusts, except for shares designated as ‘not listed’ on the markets of recognised stock exchanges, such as AIM. The rate of relief will be 50% for such assets above the £1 million threshold and for all ‘not listed’ shares.
The existing 50% rates of business and agricultural relief will continue where they currently apply (e.g. to farmland let before 1 September 1995) and will not be affected by the new allowance.
For certain trusts that were established before 30 October 2024, the £1m allowance will apply to each trust. The £1m allowance will be divided between trusts where a settlor sets up multiple trusts on or after 30 October 2024.
Extension of IHT agricultural property relief to environmental land management
From 6 April 2025, agricultural property relief will be extended to cover land managed under an environmental agreement with, or on behalf of, the UK government, devolved governments, public bodies, local authorities, or approved responsible bodies.
Analysis
The announcement from Rachel Reeves raises the issue for many farmers as to whether they will have a viable business to pass on to their successors after settling IHT liabilities.
IHT relief at only 50% over £1m will potentially create a significant cash flow challenge for family businesses. To fund the IHT payable, they will have to distribute profits out from the business as dividends subject to up to 39.35% income tax.
For a business worth, say, £5m, the IHT payable would be £800k.
To fund an IHT liability of £800k could require profits of around £1.7m in the business to be earmarked for distribution out to the family so that they can settle the IHT liability.
When you factor in the 25% corporation tax and the 39.25% dividend income tax payable to generate the net amount of £800k, this could be a significant challenge for many businesses, given that the £1m threshold will capture many small and medium-sized businesses.
While IHT in relation to shares in family businesses can usually be paid in instalments over 10 years, the rate of interest is high, at 7.5%.
Farmers will now urgently need to review their succession plans to provide the necessary resilience to ensure their businesses can cope with an increased IHT liability from April 2026.
Practical solutions could include much earlier planning to move assets out of an individual’s estate and spread across the family.
While the use of trusts can be considered, the Budget measures anticipate this, and the details of the legislation could make this route more hazardous. A consultation will be issued in early 2025.
The new rules will, in some cases, require farmers to borrow more or sell assets or parts of the farm to secure the viability of the main business.
The use of life insurance can also help to pay any IHT bills.
There are other creative ways to secure the future of a farming business facing the new threat of an IHT liability. Early action is advisable to review existing business structures and family arrangements and ensure the most appropriate measures are put in place before the new rules take effect.