The Government’s proposed changes to Inheritance Tax (IHT) for farmers have caused significant concern in the agricultural community – not least across Scotland where we have several offices.
For generations, Agricultural Property Relief (APR) and Business Property Relief (BPR) have protected family farms from the financial strain of IHT.
However, with the new rules set to take effect from 6 April 2026, farmers need to be aware of the potential impact on their estates.
While it might be tempting to make immediate changes in response to these proposals, I am not recommending knee-jerk reactions.
There is still scope for adjustments before the legislation is finalised, but it is essential to monitor the situation and start planning accordingly.
What is changing?
The key changes to IHT reliefs for farmers to be aware of include:
- Each individual will be able to claim full relief on up to £1 million of qualifying assets under APR and BPR.
- Any APR/BPR-qualifying assets above £1 million will only receive 50 per cent relief, creating an effective 20 per cent tax rate on the excess.
- The £1 million allowance applies to property held at death, lifetime transfers (including failed Potentially Exempt Transfers), and chargeable lifetime transfers (such as transfers into trust).
- The £1 million allowance is not transferable between spouses.
- Trusts created before 29 October 2024 will each receive their own £1 million allowance.
These changes mean that many family farms – which are typically asset-rich but cash-poor – could face substantial IHT bills, potentially forcing heirs to sell parts of their land to cover tax liabilities.
Who will be affected?
While not all farmers will be impacted, the changes will have significant consequences for those with large landholdings.
The National Farmers’ Union (NFU) has highlighted concerns that around two-thirds of farms could be affected, as many exceed the £1 million threshold.
For example, under the current system, an unmarried farmer with £5 million in APR/BPR-qualifying assets would not pay IHT.
Under the new rules, they could face an IHT bill of up to £800,000 – a massive burden for a farming business with limited cash reserves.
Key considerations and planning options
Given these changes, I think farmers need to start reviewing their estates and exploring ways to mitigate potential tax liabilities – without reacting too quickly.
Some key planning strategies might include:
1. Spousal transfers
If assets are passed to a surviving spouse, they remain free from IHT.
However, as the new £1 million allowance is not transferable between spouses, planning should consider how best to structure asset ownership between partners.
2. Lifetime gifting
Gifting agricultural assets more than seven years before death can remove them from the estate for IHT purposes.
However, this must be carefully planned, as gifting land can trigger Capital Gains Tax (CGT) liabilities, though Gift Holdover Relief can sometimes help.
Gifting assets is not without risk because of the loss of control that goes with it. And if the donor continues to benefit from the gifted asset, then the IHT exposure may not be eliminated because of the ‘IHT gift with reservation’ rules.
3. Use of trusts
Trusts can provide structured inheritance planning, but the rules around them are complex, especially with the upcoming changes to how the £1 million allowance applies.
Existing trusts established before 29 October 2024 will benefit from the current rules.
4. Life insurance policies
Taking out a life insurance policy written in trust can help cover IHT liabilities in the event of an unexpected, untimely death
5. Restructuring
Farmers should carefully review their existing business structures to identify whether restructuring could improve tax efficiency.
This might involve reassessing ownership arrangements, revisiting partnership agreements, or considering the incorporation of certain aspects of the farming operation.
By making strategic changes to the way the business is owned and operated, you may be able to reduce your overall tax liabilities and better position yourself for future financial stability.
Our advice
The Government has announced a technical consultation on these proposals, set for early 2025 and, as I mentioned, the public feedback has been largely negative, meaning that further changes are possible.
However, waiting until the last minute is not a viable strategy.
We are recommending that farmers start assessing their estates now to understand the potential implications and explore planning options.
Every farm is unique, and there is no one-size-fits-all solution.
We strongly suggest speaking with an expert adviser to review your specific circumstances and develop a tailored IHT strategy.
With the right planning, it is possible to protect your farm for future generations while ensuring compliance with the new rules.
We are here to help you navigate these complex changes and secure the future of your business.
